Advertising Ban and Price Coordination in Pharmacies
Analysis
This paper investigates the unintended consequences of regulation on market competition. It uses a real-world example of a ban on comparative price advertising in Chilean pharmacies to demonstrate how such a ban can shift an oligopoly from competitive loss-leader pricing to coordinated higher prices. The study highlights the importance of understanding the mechanisms that support competitive outcomes and how regulations can inadvertently weaken them.
Key Takeaways
- •Regulation, even with good intentions, can have unintended consequences on market competition.
- •Banning comparative price advertising can facilitate price coordination in an oligopoly.
- •The loss of demand spillovers, rather than just lower price elasticity, was the main driver of the price shift.
- •Understanding the mechanisms that support competitive outcomes is crucial when designing regulations.
Reference
“The ban on comparative price advertising in Chilean pharmacies led to a shift from loss-leader pricing to coordinated higher prices.”