According to economic theory, firms operating in a regime of imperfect competition increase their prices when they observe a reduction in the elasticity of demand (that is, in the consumer's propensity to go elsewhere as prices rise).
This relationship depends on the degree of competition present on the market: in particular, a higher number of firms is associated with a lower possibility of extracting surpluses from consumers with the result that the above relationship becomes less intense.
Four scholars: Giacomo Calzolari, Andrea Ichino, and Viky Nellas of the University of Bologna and Francesco Manaresi of the Bank of Italy, subjected these theoretical predictions to empirical verification, publishing their results in the "Temi di discussion" series of the Italian Central Bank .
The authors focused on the pharmaceutical market, an example of an uncompetitive market, considering the data relating to the prices and quantities of all products purchased from a large sample of Italian pharmacies (equal to 18,6 percent of the total) in the period 2007 -2010.
The first link that the research wants to verify concerns the variation in the prices of childcare products charged by pharmacies in relation to the number of births at the municipal level, assuming that the parents of newborns, typically less informed about prices and more hasty (probably due to the higher cost-opportunity of time), represent consumers who are less attentive to price differences between goods, i.e. "less elastic" .
The results of the analysis suggest that an increase in births would actually have a positive and significant effect (in a statistical sense) on the prices of baby products. This effect would be attributable exclusively to the reduction in the average elasticity of demand for less informed and more hurried consumers.
The second relationship that is tested concerns the causal effect of the increase in the degree of competition on the change in prices due to the influx of parents of newborns. In this regard, the study results from Law 475/1968 (and subsequent amendments) on the subject of authorizations to open pharmacies, which provided for (it was amended by the so-called DL 1/2012 "Cresci-Italia"), that in Municipalities with less of 7.500 inhabitants there was only one pharmacy while in those above that threshold and below 12.500 inhabitants there were two. The paper then proceeds by comparing the relationship between prices and births in the Municipalities that are immediately below this threshold with that in the Municipalities mediately above.
It emerged that the greater degree of competition reduces the margins for price increases by pharmacists following an increase in births. The effect is in fact positive and significant in Municipalities with a population immediately below 7.500 inhabitants, but statistically not different from zero in those above this threshold. In other words, in a municipality with just over 7.500 inhabitants, the addition of a competitor is sufficient to cancel the market power of a monopoly pharmacy.
Attachments: Bank of Italy – working papers
