Entry and competition of retail pharmacies: A case study of OTC drugs sales and ownership deregulation

Abstract

This study provides new empirical evidence on the changes in competition and entry decisions of pharmacies after regulatory changes. It investigates the development of the retail pharmacy market in Portugal, which underwent major regulatory changes in 2004 and 2007. Sale of OTC drugs and ownership of pharmacies were liberalized while entry restrictions related to market size and the location of new pharmacies prevailed. Our empirical strategy was based on entry models and provided indirect information on the toughness of competition and entry decisions of firms in the market. We estimated and compared the entry thresholds and their ratios before and after liberalization. Such a comparison allows to see if competition got tenser with OTC drugs deregulated. There were three main findings from the study. First, the entry thresholds decreased regardless of the number of pharmacies in the market, suggesting that room for the realization of profits is broader than it was in the past. Second, although the entry thresholds were lower in value, their increase was steeper with each incumbent in 2020, suggesting harsher price competition with new entrants. Third, the current rule of 3,500 patients per pharmacy is likely overly restrictive, pharmacies could break-even even in smaller markets.