Public Entry, Heterogeneous Consumers and Private Prices : New Evidence from India

Public sector provision allows redistribution of essential goods and services but may also create adverse impact on private-sector providers. How do private firms respond to the entry of a public rm? Answering this question can help design policies to balance redistribution against private sector investment. In this paper, we study the effect on pricing by private-sector pharmacies after the entry of public-private dispensaries which sell discounted drugs. We find that the eventual response of the private sector depends on the underlying consumer preferences. For drugs with high elasticity consumers, retail and wholesale prices in private firms decline as most consumers shift away, retailers reduce mark-ups which puts downward pressure on wholesale prices as well. Anti-cancer drugs, however, which have lower elasticity, experience an increase in wholesale prices only high elasticity consumers sort into public options, allowing private pharmacies to compete more aggressively for these drugs in the wholesale markets. We also find that higher concentration of private retailers amplifies the impact, indicating the role of market structure in private sector response. This paper contributes to the literature by showing the effect of consumer heterogeneity in private response to public firm entry