Spatial Effects of Price Regulations and Competition. A Dynamic Approach to the German Retail Pharmacy Market

This paper examines the e ect of price competition on the location choices of retail pharmacies in large cities. I exploit a regulatory change in 2004 that introduced price competition for non-prescription drugs to estimate the parameters of a dynamic spatial entry model, using a comprehensive panel dataset of retail pharmacy locations. The dynamic model is estimated by means of a nested fixed point approach, because the asymmetric nature of the entry game renders conventional two-step estimators inapplicable. The computational burden of this approach is alleviated by tailoring the concept of oblivious equilibrium, developed by Weintraub et al. (2008), to the spatial nature of the game. I find that the regulatory change lead to more intense local competition and lower entry costs. The estimated structural model is then used to decompose the effects of the regulatory change on market structure and consumers' travel distances. I find that one third of the total decline in the number of pharmacies between 2004 and 2016 is attributable to increased local interaction, whereas it caused the consumers' distance to the nearest pharmacy to increase only marginally. This suggests that price competition is beneficial for consumers not only because it lowers retail prices, but also because it leads to a more efficient spatial distribution of retail pharmacies.