Cross-Market Price Elasticity for Pharmaceuticals

Most developed countries have two main pharmaceutical markets: the hospital and the retail(pharmacy) market. I examine
how pharmaceutical pricing in the retail market influences pricing in the hospital market using data from Finland.
Hospital market prices are set through public procurement while the retail market prices are determined by the
competition among oligopolistic firms given the regulatory constraints. Pharmaceutical procurements use the regulated
retail market price as a reservation price. Retail market price regulation does not take this institutional feature into account. In this paper, I study how large are the pricing spillovers from the retail market to the hospital market. I
quantify the size of the pricing spillover by estimating cross-market price elasticity. I use a instrumented
differences-in-differences design. Elasticity is identified by utilizing an exogenous change in the retail market price
regulation as a instrument for the retail market price. Estimated elasticity ranges from 1.15-1.3. Result indicates that there are pricing spillovers with economic significance between the pharmaceutical markets. My results highlight the
need to jointly evaluate both pharmaceutical markets when new reforms are implemented to retail market.