Industrial Organization Study on Spillovers Between Pharmaceutical Markets

This thesis is a study in the field of applied industrial organization. The unifying theme of the study are the spillovers between hospital and retail pharmaceutical markets in Finland. This dissertation consists of five chapters where the first chapter serves as the thesis introduction. The second thesis chapter introduces the Finnish pharmaceutical market. The chapter highlights the institutional arrangements which foster connections between the two pharmaceutical markets and explains the regulation relevant to the analysis presented in this thesis. The third chapter develops a simple theoretical model which describes the equilibrium relationships between the two pharmaceutical markets. The theoretical model provides testable implications for Chapters 4 and 5. The fourth thesis chapter investigates the existence of demand spillovers between the two pharmaceutical markets. I examine how pharmaceutical use in the public sector hospitals influences pharmaceutical sales in the retail market. Hospitals use public procurement to obtain pharmaceuticals to the hospital pharmaceutical selection. My research design exploits procurement-induced changes in the hospital selection. I find that retail market sales increase by 2%-47% due to winning the hospital procurement. I also find that reimbursement status and procurement discounts are positively associated with the demand spillover size. For the procurement losers, the effect is mostly negative and ranges from -16% to 2%. A conservative interpretation is that these results represent the upper bound of the actual treatment effect. The fifth thesis chapter investigates the existence of pricing spillovers between the two markets. I investigate how changes in the price paid by the retail market pharmacies are transmitted to the prices offered in the hospital procurements. The retail market price regulation tries to keep the wholesale prices as low as possible but at the same time the regulator does not take into account the fact that the wholesale prices are used as the reservation price in the hospital procurements. I examine the effect of reference price regulation on pricing in both markets. I find that exogenous changes in the wholesale prices paid by the retail market pharmacies are fully transmitted to the bids hospitals receive. The resulting cross-market price elasticity between the hospital bids and the retail market wholesale price varies between 1.15-1.3, implying that the impact of price regulation reaches more widely than just to the retail market. These results demonstrate the need for incorporating the hospital market into the analysis of the pharmaceutical reforms.