Market Power and Regulation in Pharmaceutical Markets

We exploit the regulatory environment in the Austrian pharmaceutical market to study the effects of price regulation on market outcomes and consumer welfare. We evaluate all mergers of drug producers in the 2009-2017 period and find that the coexisting regulated and unregulated markets were unequally affected. While M&A have substantially increased prices without regulation, particularly for price-inelastic products, prices did not increase under regulation. Instead, variety increased in regulated markets. Therefore, regulation can successfully mitigate the effects of market power: whereas M&A decrease consumer welfare absent regulation, the additional product variety increases consumer welfare in the regulated market.