Free Entry and Social Inefficiency in Regulated Pharmacy Markets

We study entry deregulation in the Finnish pharmacy market where prices, markups, and the number and location of pharmacies are regulated. Our counterfactual simulations show that the number of pharmacies increases substantially, particularly in urban areas. Although almost all consumers benefit, rural areas and areas with older populations benefit less. The increase in aggregate consumer surplus is dominated by significant decreases in pharmacy profits and government tax revenue. As a result, free entry turns out to be socially excessive. The prevailing entry restrictions may thus work reasonably well from a total welfare perspective, but with distributional consequences: They benefit incumbent pharmacists at the expense of customers.