Pharmacies
J-R Borrell, University of Barcelona, Barcelona, Spain
C Cassó, University of Barcelona, Barcelona, Spain, and Northeastern University, Boston, MA, USA
r 2014 Elsevier Inc. All rights reserved.
Glossary
Double marginalization Phenomenon in which pricing
of any good or service turns out to be excessive because not
only manufacturers that have upstream market power
overcharge in equilibrium equating its marginal costs and
marginal revenue from its residual demand but retailers
also overcharge as they can profit from their dominant
position downstream equating again marginal costs to the
marginal revenue from its residual demand. It is called
double marginalization when upstream and downstream
firms are separated. When both are vertically integrated in
one unique firm, the phenomenon disappears and price
turns out to be lower as the vertically integrated firm
equates marginal cost to marginal revenue just once.
Over-the-counter (OTC) medicines Medicines that can
be offered in pharmacies, or in some jurisdictions in other
retail outlets, and that can be readily available to the public
from the store shelves. Usually, these are medicines that
Introduction
Dispensing medical drugs is a profession that combines the
particularities of a professional service and retail industry. The
focus here is on retail pharmacy, leaving aside the special
character of hospital pharmacies.
First, pharmacists are responsible for a range of pro-
fessional services including offering advice and assistance to
those receiving their medication. Pharmacists are responsible
for making sure that people receive their medication safely
and professionally. Second, a network of pharmacies and
other retail outlets is a major vehicle for public policies de-
signed to make pharmaceuticals available and affordable to
the public throughout a jurisdiction. However, different jur-
isdictions do this differently. There is no single ‘template’
policy model that fits all jurisdictions.
In the middle- and low- income countries, there is tension
between policies aimed at safe and proper dispensing and
those aimed at availability and affordability.
This article focuses on the policy challenges that arise
in setting up the rules and regulations governing this pro-
fessional trade, the tradeoffs that need to be evaluated when
designing markets in health care and the role of health eco-
nomics in promoting public policy.
The article is organized into four sections. After the intro-
ductory section, the key policy instruments that are available
to policy-makers and societies are highlighted and described
(Section Challenges and Policy Options). The focus is on the
differences between the quality, entry, and price regulations
that characterize policies based on a competitive market and
Encyclopedia of Health Economics, Volume 3 doi:10.1016/B978-0-12-375678-7.01305-5
have been in use for some time and which may only cause
minor adverse effects when not used properly. There is
usually enough competition among providers of such
medicines among innovator brands, other brands, and
generic alternatives. In many jurisdictions, direct to
consumer advertising is only permitted for OTC drugs, but
in others such as in the US, direct to consumer advertising is
also permitted for pharmacy-only and prescription-only
medicines.
Pharmacy-only medicines Medicines that can only be
obtained from a pharmacy outlet, but which do not require
a doctor’s prescription. Such medicines may be dispensed
only with the advice and assistance of a pharmacist.
Usually, these are medicines that have been available for
some time and that have no serious adverse effects when
properly taken.
Prescription-only medicines Medicines for which a
doctor’s prescription is a legal requirement.
on those that rely much more on a regulated command and
control framework.
In Section Benefits and Risks from Regulating Pharmacies
an assessment of the pros and cons of quality, entry, and price
regulations is dealt with.
Challenges and Policy Options
Societies face a twofold challenge when organizing pro-
fessional retail pharmacy markets.
First, the structure of the market should address the fol-
lowing to ensure that
1. the consumers get assistance and advice that is free from
the personal interests of prescribers;
2. the consumers receive assistance and advice that is free
from the personal interests of dispensers, particularly when
a prescription is not filled; and
3. that the pharmacists and their assistants are professionals
qualified in medicine and pharmacy.
Second, pharmacies are retail outlets that serve the cause of
better access: through which professionals make affordable
pharmaceuticals available to the local public. Key drivers of
availability and affordability are the following:
1. Reimbursement arrangements: These should ensure that
there are sufficient retail outlets or other distribution
channels for pharmaceuticals across the country to dis-
pense the medicines that are reimbursed by health care
organizations.
49
50 Pharmacies
2. Competition: Competitive pressure upstream helps retail
pharmacists to get the best deal from wholesalers and
manufacturers, with pharmacies ideally offering good deals
to their customers and passing on to them most of the gain
from the upstream competitive interaction.
3. Behavioral regulations: These ensure that providers, whe-
ther independent pharmacies or companies running
pharmacy chains, do not abuse the public if they reach a
dominant position in distribution and dispensing in their
catchment geographical areas.
Given the objectives of safety/proper dispensing and
availability/affordability, legislatures and governments regu-
late key elements of the industry. There are three well estab-
lished traditions in high-income countries regarding the two
main objectives. In most countries of continental Europe, the
trade is generally reserved to licensed community pharmacies
owned by independent pharmacists or by national, regional,
or local governments. There are therefore rules limiting own-
ership of pharmacies to those who are licensed or employees
of or contractors to the State. There are also rules that limit the
number of pharmacies that each licensed pharmacist can own
(usually a one-pharmacy-per-pharmacist rule). Moreover, in
many countries, community pharmacies are subject to entry
restrictions based on various tests of need.
In most European countries, chains are not permitted;
vertical integration of retail pharmacies with medicine
wholesalers or manufacturers is not permitted. Community
pharmacies are obliged to sell the full line of authorized
medicines in each country and deliver some health care ser-
vices for other mandated health care providers.
By contrast, in the US and Canada there are no entry re-
strictions: there is free entry. Pharmacy chains owned by lim-
ited or public companies are common, although such
companies contract licensed pharmacists to manage the ser-
vice under stringent professional codes. There are also many
independent pharmacies owned by professionals that com-
pete with the company-owned chains. Both independent
pharmacies and chains are obliged to sell the full line of au-
thorized medicines and drugs in each country. However, they
contract in a voluntary basis with mandated health care pro-
grams (Medicare and Medicaid in the US), and with health
maintenance organizations, the extra services related to the
reimbursement of drugs within the health plans.
The UK, Ireland, and the Netherlands adopt an intermediate
regulatory stance. There is no formal regulation limiting the
entry of pharmacies. Entry is effectively restricted by contracts
with the mandatory health care organizations. Potential en-
trants do not effectively enter without securing a contract and
such organizations award them only after considering carefully
the incremental benefits and costs of new pharmacy openings.
In these three countries, pharmacies (‘chemists’ in the UK)
are independent retail outlets that contract to fill prescriptions
covered by the mandated health care organizations. They also
dispense pharmacological products prescribed by physicians
not paid by the mandated health care organizations, and they
also sell other medical products not requiring a prescription,
as well as a wide range of common hygiene and health-related
products. Some have broadened their range to embrace pho-
tography and other chemical-based product lines, and even
products and services having little or nothing to do with
health or health care. These ‘chemists’ compete with other
retail outlets that sell over-the-counter (OTC) drugs without
doctor prescription, other medicinal products and any other
product and service.
In the middle- and low-income countries, all types of
regulation can be found depending on the historical circum-
stances of each. However, middle- and low-income countries
often have unregulated retailers that effectively sell many types
of pharmaceutical drugs usually with neither a pharmacist-
manager on the premises nor qualified assistant. Such outlets
typically neither satisfy the obligation to sell a full line of
drugs, nor ensuring that they dispense prescription-only drugs
only when a qualified prescriber prescribes them.
There are six policy instruments used by most countries in
the world that distinguish these three different pharmacy
models: (1) restrictions to practice: professional licensing;
(2) ownership restrictions; (3) separation of prescribing and
dispensing; (4) pharmacist management, supervision, and
assistance; (5) zoning; and (6) price regulation.
Restrictions to Practice: Professional Licensing
Professional licensing in retail pharmacy, that is, restricting the
practice of pharmacy to qualified professionals is the law in
almost all countries across the globe.
Countries differ in licensing retail pharmacy according to
how ‘the practice of pharmacy’ is defined: (1) whether, or
not, the ownership of a pharmacy is part of the practice of
pharmacy, and as such, it is reserved only to pharmacists;
(2) whether the management of the pharmacy is part of the
practice of pharmacy, and as such, it is also reserved only to
pharmacists; and (3), whether dispensing of medicines is part
of the practice of pharmacy and as such is also reserved only to
pharmacists.
In high-income countries, pharmaceutical retailing is re-
served to pharmacists. It includes professional owners of
independent pharmacies and professionals, who should be
hired to manage, organize, even supervise or assist part or all
retailing of medicines at each one of the outlets of any com-
pany operating a chain of pharmacies. This restriction is
commonly observed and generally enforced.
By contrast, in middle- and low-income countries there are
gray or second-tier outlets that sell medicines. Such outlets
have no pharmacist owning the outlet, or to manage, organize,
supervise, or assist the dispensing of medicines.
Availability and affordability problems in middle- and low-
income countries are so severe that the authorities do not
enforce professional licensing regulations on the grounds that
such enforcement may further reduce the reach of their weak
distribution networks. Having a licensed pharmacist per-
forming these duties is perceived as an excessive cost of ser-
vicing in the outlet, partly fixed and partly marginal, that
would eventually increase the price of the dispensing service.
This is particularly true when medicines are sold without any
pharmacist involvement in the preparation of packages with
convenient labels and patient information leaflets containing
clear and comprehensible directions for use. Mexico is among
the few countries in the world in which the law clearly allows

pharmaceutical products to be sold in retail outlets without
any pharmacist managing, supervising, or assisting the dis-
pensing. Pharmacist involvement is only mandated in the case
of dispensing psychotropic drugs.
Ownership Restrictions
Many countries reserve the ownership of pharmacy retail
outlets to professionals or the state. Some countries allow the
competition of nonpharmacist-owned outlets (usually com-
pany chains) with independent pharmacies (owned by
pharmacists). Others forbid professional pharmacists to own
the pharmacies in which they work.
The question of pharmacy ownership is controversial.
Those in favor of restricting ownership to pharmacists claim
that the key to make the pharmacy trade professional is the
mandatory membership of the pharmacist-owner to a pro-
fessional organization. They claim that only by having the
pharmacist-owner subject to the rules and supervision of the
professional body will pharmacists advise and assist patients
in buying their medication according to the standards of safety
and proper dispensing.
Without such ownership restriction and professional
supervision, the claim goes, the personal interests of
pharmacist would supersede the interests of the patient. At the
same time, they claim that the standards of safety and proper
dispensing should be decided by these professional bodies to
which pharmacist-owners are affiliated and not by other
government or industry bodies, which may in turn again give
priority to their interests before the patient interests.
The main argument against the restriction of ownership of
pharmacies to licensed pharmacists is that pharmacists-owners
can also give priority to their interests before those of their
patients. Professional bodies, which are mainly controlled by
pharmacy owners, do not always set up the appropriate
standards of conduct, nor do they always enforce sanctions
against those affiliated owners who misbehave. It may even be
easier to supervise and enforce standards of conduct over
company chains that are liable for the conduct of their man-
agers and employees and over pharmacists employed to
manage outlets in pharmacy chains.
There are different perceptions of legal enforcement: for
example, about the effectiveness in different jurisdictions of
the different mechanisms for setting standards of behavior,
organizing external supervision, and enforcing sanctions when
there is misbehavior. Ultimately, enforcement depends on
how clear the set of rules is and how tough the judiciary is in
enforcement and penalty.
Ownership restrictions are widespread in Europe. As many
as 18 out of 27 EU Member States reserve ownership of any
pharmacy to a licensed pharmacist. It is only the Netherlands
(since 2000) and Ireland among the old EU Member States
that have free pharmacy ownership, together with most of the
new EU Member States: Poland, the Czech Republic, Estonia,
Lithuania, Malta, Slovakia (since 2005), and Slovenia (re-
cently deregulated). Ten of the 27 EU Member States have
state-owned community pharmacies: Bulgaria, Cyprus, Czech
Republic, Hungary, Italy, Luxemburg, Malta, Poland, and
Slovenia. Sweden is the only case in which the entire
Pharmacies 51
pharmacy trade was reserved to a state-owned enterprise from
1971 to 2009. In 2009, the Swedish government started to sell
part of the state-owned pharmacy chain in clusters and new
private pharmacies have been established, some in joint ven-
tures with multinational chains. The new chains compete with
the remaining part of the state-owned pharmacy chain.
Among middle- and low-income countries, Tanzania,
Kyrgyzstan, Uganda, and Guatemala have state-owned phar-
macies and other special arrangements such as contracted
independent pharmacies and franchised Non-Governmental
Organization pharmacies. The Dominican Republic project
‘People’s Pharmacies’ is a successful program sponsored by the
government to make available and affordable essential generic
medicines for low-income families in all state-owned and
managed health care premises, including state-owned phar-
macies and hospital pharmacies. Sixteen out of the 27 EU
Member States allow pharmacists to own only one in-
dependent pharmacy. In the remaining 11, pharmacy chains
are allowed and widespread: Austria, Ireland, Netherlands,
and Sweden among the old EU Member States, and the Czech
Republic, Estonia, Latvia, Lithuania, Poland, Romania, and
Slovakia among the more recent ones.
Chains are widespread and compete with independent
pharmacies in the US, Canada, Mexico, and the Philippines.
South Africa (since 2004) and Kyrgyzstan have corporate
managed care preferred pharmacy networks.
Ownership restrictions to just one independent pharmacy
go together with the prohibition on vertical integration with
wholesalers or manufacturers. By contrast, when ownership is
free and chains allowed, it is very common for some chains to
integrate vertically with wholesalers or manufacturers. In such
cases, economies of scale and scope may be attained and
passed on to consumers. Those economies may not be passed
on to consumers when chains reach dominant positions in the
distribution of the medicines of some affiliated manufacturers,
or in the distribution of all medicines in some catchment
areas.
In the EU, the courts have upheld ownership restrictions
when they have been questioned as being contrary to the
freedom of establishment in the internal market. Pharmacy is
excluded from the rules of the internal market and the service
directive only when member States reserve the pharmacy trade
to a regulated health profession or a state-owned entity as a
means of protecting health in the context of a mandated or
public organized health care system.
Prescribing and Dispensing Separation
Separating prescription of medicines to doctors (or prescribing
nurses) and dispensing to pharmacists is a way of reducing
conflicts of interest. Most countries forbid doctors from dis-
pensing drugs and classify medicines in one of the following
categories, depending on the level of advice and assistance that
pharmacist should provide:
1. Prescription-only medicines: Medicines only with the pre-
scription of one authorized to prescribe.
2. Pharmacy-only medicines: Medicines that can be obtained
only from a pharmacy outlet, but which do not require a
prescription from an authorized practitioner.
52 Pharmacies
3. Over-the-counter (OTC) medicines: Medicines that can be
made readily available to the public in other retail outlets –
as well as in pharmacies.
In the legislation, prescribing by a doctor or a nurse-pre-
scriber and dispensing by a pharmacist is the general rule in
Europe, the US, and Canada. However, Austria, Belgium,
Czech Republic, Cyprus, Finland, France, Greece, Hungary,
Malta, Slovenia, and the UK allow exceptionally doctors in
rural areas to perform both the prescribing and dispensing of
pharmaceuticals in order to make sure the availability of
service in remote areas.
By contrast, many countries, particularly in Asia and Latin
America, have dispensing doctors or integrated health centers
and pharmacies. The problem with this integration is that
dispensing doctors are influenced in their prescribing de-
cisions by their personal financial incentives at dispensing.
The Philippines have encouraged the separation of prescribing
and dispensing since 1995, and fees have been designed to
financially promote such separation since 2002. By contrast,
South Korea has clearly mandated the separation of pre-
scribing and dispensing. However, enforcement of pre-
scription-only and pharmacy-only rules varies strongly across
countries. In many higher-income countries, and in most
middle-and low-income countries, dispensing prescription-
only medicines without any doctor prescription is widespread.
In these cases, the advice of pharmacists is the key to
making sure that the safety and proper dispensing of medi-
cines to patients is paramount. In such settings, financial in-
centives also apply: there is a lot of evidence that pharmacists’
financial interests have an impact on the kind of advice and
sales services they provide.
Pharmacist Management, Supervison, and Assistance
Most countries require that a pharmacist should manage the
service and be responsible for ensuring that the pharmacy
(whether independent or within a chain) complies with all
professional rules, regulations, and standards. They also
require that at least one pharmacist is always present and in
charge of supervising or assisting in the dispensing of
pharmaceuticals.
This is easier said than done in independent pharmacies,
particularly in ‘mom-and-pop’ pharmacies in middle- and
low-income countries. It is not clear cut whether enforcement
of the rules of the profession is easier in company-owned
pharmacy chains as competitors and pharmacists unions
usually track compliance, or when all pharmacies are in-
dependently owned and supervised by a professional body
governed by pharmacy owners or independent experts.
As mentioned before in the section Restrictions to Practice:
Professional Licensing, Mexico is among the few countries in
which the law allows pharmaceuticals to be sold in retail
outlets without any pharmacist managing, supervising, or as-
sisting in their dispensing. Pharmacist involvement is required
only when dispensing psychotropic drugs. Moreover, as pre-
viously observed, many low- and middle-income countries do
not enforce the law requiring pharmacist management,
supervision, and assistance when retailing medicines.
There is a cost–benefit tradeoff to be evaluated by policy
makers: having a pharmacists manage, supervise, and assist in
the dispensing of medicines is expensive, particularly in the
countries that lack qualified professionals, and the pricing of
medicines will reflect these extra costs.
Zoning: Restricting Entry and Location of Pharmacies by
Tests of Need
In most of continental Europe, independent pharmacists are
subject not only to tight licensing regulations that restrict the
trade to licensed professionals but also to government regu-
lations that limit the number of pharmacies that can be open
to the public in any given catchment geographic area. In 17 of
the 27 EU Member States, entry restrictions under the formal
form of zoning, quotas, or distance regulations apply. Among
these countries, Slovakia has deregulated entry since 2005 and
Slovenia is deregulating it. Hungary experienced some de-
regulation of entry and reregulation between 2007 and 2010.
Portugal introduced some less restrictive entry conditions
in 2006.
When zoning is in place, pharmacies are authorized to
enter after some needs test, usually when the population to be
served reaches some specified threshold. Three EU Member
States have explicit distance regulations: Greece, Hungary, and
Spain. Another three Member States (the Netherlands, Ireland,
and the UK) indirectly control the number and location of
pharmacies by awarding contracts from national health ser-
vices to a restricted number of community pharmacies.
Among the Member States, only, Bulgaria, Cyprus, the Czech
Republic, Estonia, Germany, and Poland do not restrict entry
according to any population need test.
Outside the EU, Norway at one time restricted entry. Cur-
rently, entry is free but pharmacy market shares are restricted.
Entry is also free in Iceland, the US, Canada, and the Philip-
pines. In Latin America, there are cases like the Dominican
Republic where minimum distance entry regulations are in
operation, and in countries like Chile and Mexico where the
number and location of pharmacies is freely determined.
South Africa has a restrictive system as new pharmacies have to
obtain a certificate of need. It also operates a system of com-
petitive price bidding for franchises. Mali has placed some
limits to opening a pharmacy at the capital, Bamako, with the
(unsuccessful) intention of moving new entrants to rural
areas. India has passed more liberal legislation between 2000
and 2004. Mexico and the Philippines have been very suc-
cessful in promoting the entry of pharmacy chains only for
dispensing generics brands, boosting availability, and afford-
ability of medicines throughout their territories.
Price Regulation
Pricing regulation in the pharmacy industry takes the form of
mandated dispensing fees, maximum margins (percentage
over the final price), or markups (percentage on the manu-
facturer’s or wholesale price). Margins or markups can be fixed
or regressive with respect to prices, and there might be rules
mandating that no discounts and promotions are offered to

the public, or that such discounts should be subject to a
maximum.
Entry restrictions in Europe are typically coupled with price
or retail margin regulations. Seventeen out of 25 EU Member
States (all but Romania and Bulgaria, for which the authors do
not have information) set the pharmacy markups by regu-
lation. Discounts are not allowed. The other eight set max-
imum markups or fees for services allowing competition in
discounts and promotions.
Discounts to final consumers are allowed only in Cyprus,
the Czech Republic, Estonia, Lithuania, the Netherlands, Pol-
and, Portugal, and Slovakia. Denmark, France, Germany, Ire-
land, and Spain allow for limited discounts in medicines not
listed for mandatory health care systems reimbursement. The
Netherlands, the UK, and Spain mandate some clawbacks to
the national health systems that get back from pharmacies part
of the discounts obtained from wholesalers and manufacturers.
In general in the EU, pharmacists are paid a fixed but re-
gressive margin with respect to the price of each medicine
sold. In Ireland, the Netherlands, and Slovakia pharmacists
are paid a fixed fee for service, and in the case of the UK their
purchase costs are reimbursed and there is a separate fixed fee
for service.
In the US and Canada, pricing is free but it is agreed with
Health Maintenance Organizations and the federal programs
(Medicare and Medicaid) for reimbursed medicines.
Australia, New Zealand, and Syria have also regressive
margin with respect to final prices to consumers. By contrast,
in most low- and middle-income countries, pricing is regu-
lated as a fixed margin over prices to consumers.
Benefits and Risks from Regulating Pharmacies
Having reviewed entry and price regulation in the world-wide
industry, now it is time to turn to some economic analysis of
the rationale for such regulations and review the practical
experience with such regulations.
To start with it is required to assess how quality deterior-
ation can result both in the presence and absence of infor-
mation asymmetries. When quality deterioration is present, all
four regulations outlined before (professional licensing,
ownership restrictions, prescribing, and dispensing separation
and management/supervision/assistance mandates) may help
the industry to reduce it at a reasonable cost. Then the pros
and cons of entry and pricing regulations are reviewed.
Regulating the Quality of Service
Quality deterioration
Professional services, in general, involve the application of
professional human capital in order to judge individual cases.
As a result of this peculiarity of the professional trades, the
quality of the service provided is difficult to assess objectively.
In the case of the pharmacy business, in general, a medical
doctor makes the judgment as to which drug treatment is
appropriate for each patient. Among the pharmacists’ duties,
the most important is to fill the prescription correctly, to ad-
vise the patient how best to comply with the treatment, and to
Pharmacies 53
prevent undesired drug interactions. In the case of OTC drugs,
the pharmacist also assumes the duty of advising the patient
regarding her decision on which drug is better for her specific
minor ailment.
In contract theory terms, the patient is the principal and
pharmacist is her agent. However, the agent has an infor-
mation advantage. The pharmacist decides whether to invest
effort in providing a high-quality service, or shirk and provide
a low-quality service. The patient knows, but only imperfectly,
about the quality of the service received after the purchase.
This is a simple and typical hidden information situation
usually termed a ‘screening problem.’ It can lead to quality
deterioration phenomenon through adverse selection of ser-
vice providers in the market. Patients would like to screen the
high and low quality of service pharmacies out of the pool of
available pharmacies. The separating equilibrium with full
information is the one that allows the patients to pay for the
high- or low-quality service, depending on their preferences
and willingness to pay. For example, patients receiving new
treatments may prefer to pay for a high-quality service,
whereas patients with chronic diseases receiving repeat pre-
scriptions may prefer to pay less for a low-quality service.
When patients cannot distinguish the pharmacy type due
to the lack of information regarding the provider, and only
uniform pricing is available as arbitrage is almost costless, the
well-known problem of adverse selection is encountered. All
pharmacies would end up by serving only at the low price and
low-quality level.
Professional licensing may be used so as to regulate min-
imum quality standards: it screens the more able providers
and deters shirking. Almost any licensing requirement im-
poses a fixed cost of entry that may drive out the least able
providers: the entry cost is simply not affordable for the
potential entrants with lower abilities.
Quality deterioration may also occur when there are no
information asymmetries, when providers serve the marginal
consumer having the lowest willingness to pay for quality.
Minimum quality standards can help to avoid such outcomes.
Such regulations are supposed to drive quality up, lifting it
closer to the willingness to pay by the average consumer. In
doing so, these regulations can raise welfare. Professional li-
censing and rules restraining management, supervision, and
advising only to professional pharmacists may help out to
monitor minimum standard quality regulations.
Licensing, externalities, and public goods
Professionals in general, and pharmacists in particular, pro-
vide services not only to their consumers but sometimes also
to the public at large in the form of externalities or by pro-
viding public goods. When pharmacists dispense vaccines, it is
not only their customers that gain some surplus but also the
public at large thanks to an externality in the form of a re-
duced probability of other people contracting the disease in
question. Likewise, when pharmacists dispense narcotics or
antibiotics only with a proper prescription, it is not only that
their patients benefit but also the public in general. Avoiding
drug dependence or antibiotic resistance is something that
improves other people’s health.
The regulation of professional behavior is usually justified
by rationales such as these. Codes of conduct for filling
54 Pharmacies
prescriptions, checking for drug interactions, serving chronic
patients, and so on, contribute to the benefit of both patients
and the public at large. Pharmacists also produce positive
externalities in their role of gatekeepers.
Pharmacists are paid for these services. Some argue that,
while performing these duties, the pharmacist should keep the
associated rents. The threat of being expelled from the licensed
profession would then also entail loss of rents that further
restrains them from underperformance. Entry restraints and
professional body oversight is thus viewed as a mechanism for
encouraging compliance with their professional obligations.
Alternatively, the pharmacist might be paid for preventive
services.
Regulating Entry through A Needs Test and Pricing
Theory is ambiguous as to whether there is scope for welfare
enhancing entry regulations in markets of differentiated
products in the retail pharmacy industry. The literature has
identified instances in which restrictions in the number of
suppliers or price controls, or a combination of both, may be
welfare increasing.
In each locality, entry brings the benefits of greater price
competition and better local availability (access). Consumers
gain from both, receiving cheaper medication and having
outlets closer to where they are located. Each new entrant
steals business from the pharmacies located in their catchment
area but at the same time brings benefits to consumers. In
industries in which there are no fixed costs of entry (an up-
front cost not related to the volume of business), free entry is
welfare enhancing.
Free entry may, however, be excessive. Entry is excessive
whenever differentiation by location is low (consumers are not
willing to pay for having more pharmacies at different locations
in any catchment area). In this case, entrants add less to the
consumer surplus when they enter the market than the amount
they reduce the profits to incumbents by stealing their business
from them. So, if the fixed costs of servicing patients are large,
there is scope for a welfare enhancing regulation that restricts
entry. At the same time, competition in each catchment area
will take the form of an oligopoly game, so there might be also
scope for pricing regulation. The equilibrium pricing game
drives pricing in oligopoly well above marginal or average costs.
The more general models of pricing in oligopoly games
with product differentiation show that the Nash equilibrium
implies prices that differ from marginal costs. Additionally,
when pharmacies have dominant positions in their catchment
areas, there is also room for policy to avoid what it is known
as double marginalization, when the upstream market of
manufacturers or wholesalers is not competitive enough.
Double marginalization appears when prices turn out to be
excessive not only because manufacturers or wholesalers have
upstream market power to overcharge in equilibrium but also
retailers can overcharge as they can profit from their dominant
position downstream. Limiting this double marginalization by
allowing manufacturers or the government to set the final
price can be welfare enhancing.
However, private interests might lobby for entry re-
strictions and pricing regulations to ensure that pharmacists
obtain excess profits or pure regulatory rents. The European
Commission has initiated infringement proceedings against
countries that operate over tight entry and ownership regu-
lations on the grounds that restricting freedom of establish-
ment is neither an adequate nor a proportional public
interest policy. On the contrary, the EC argues that it is a way
of guaranteeing rents for incumbent pharmacies. The Euro-
pean Commission has initiated infringement proceedings
against Austria, Bulgaria, France, Germany, Italy, Portugal,
and Spain, though the results of infringement proceeding
have been modest.
Attempts to reform entry and pricing regulations are
problematic as the incumbents occupying the upper tail of the
distribution and who gain most from the restrictions will
invest heavily in lobbying to avoid policy reforms.
Concluding Remarks
Countries should choose the combination of policy options
according to their efficiency and feasibility in any constrained
environment.
Getting prices right (i.e., close to average costs, whether by
competition, regulation, or contractual arrangement) is key to
approaching an optimum. It makes entry regulation un-
necessary. However, it should be borne in mind that any good
price regulation or contractual arrangement has to get the
number of pharmacies right when setting the price.
Adjusting the price to the costs in different localities is also
important and difficult but it is essential to make sure that
pharmacies are available and open to the public throughout
the territory.
When countries do not have the institutions, the human
capital or the technology to get the pricing right or to get the
right number of pharmacies, they have to evaluate whether
capture drives regulation toward undesirable outcomes and
whether free pricing and entry is an attainable and reasonable
second best.
Acknowledgment
The authors acknowledge the unconditional research
grants from the Spanish Ministry of Science and innovation
(ECO2009-06946), the Catalan Government (SGR2009-
1066), and RecerCaixa (unconditional research grant from
Fundació La Caixa, the philanthropic arm of the savings bank,
La Caixa).
See also: Health Services in Low- and Middle-Income Countries:
Financing, Payment, and Provision. Infectious Disease Externalities.
Internal Geographical Imbalances: The Role of Human Resources
Quality and Quantity. Markets in Health Care. Markets with Physician
Dispensing. Occupational Licensing in Health Care. Pharmaceutical
Marketing and Promotion. Pharmaceutical Pricing and
Reimbursement Regulation in Europe. Primary Care, Gatekeeping,
and Incentives

Further Reading
Abood, R. (2007). Pharmacy practice and the law (5th ed). Sudbury, MA: Jones
and Bartlett Publishers.
Alderighi, M. and Piga, C. A. (2012). Selection, heterogeneity and entry in
professional markets. Available at SSRN: http://ssrn.com/abstract=2194391 or
http://dx.doi.org/10.2139/ssrn.2194391
Anderson, S. (2002). The state of the world’s pharmacy: A portrait of the pharmacy
profession. Journal of Interprofessional Care 16(4), 391–404.
Arruñada, B. (2006). Managing competition in professional services and the burden
of inertia. In Claus-Dieter, E. and Isabela, A. (eds.) European competition law
annual 2004: The relationship between competition law and the (liberal)
professions 2006, pp. 51–71. Oxford and Portland Oregon: Hart Publishing.
Borrell, J. R. and Fernández-Villadangos, L. (2009). Assessing excess profits from
different entry regulations: The case of pharmacies in Spain, Xarxa de Recerca
en Economia Aplicada (XREAP) Working Papers, 2009–3. Barcelona.
Borrell, J. R. and Fernández-Villadangos, L. (2010). Clustering or scattering: The
underlying reason for regulating distance among retail outlets, Xarxa de Recerca
en Economia Aplicada (XREAP) Working Papers, 2010–12. Barcelona.
Pharmacies 55
European Commission (2008). Pharmaceutical sector inquiry. Preliminary Report,
DG Competition Staff Working Paper, Brussels.
Mankiw, N. G. and Whinston, M. D. (1986). Free entry and social inefficiency.
RAND Journal of Economics 17, 48–58.
ÖBIG (2006). Surveying, assessing and analyzing the pharmaceutical sector in the
25 EU Member States. Report Commissioned by the DG Competition –
European Commission, Office for Official Publications of the European
Communities, Brussels.
Roberts, M. J. and Reich, M. R. (2011). Pharmaceutical reform: A guide to
improving performance and equity. Washington, DC: The World Bank.
Schaumans, C. and Verboven, F. (2008). Entry and regulation. Evidence from health
care professions. RAND Journal of Economics 22, 490–504.
Waterson, M. (1993). Retail pharmacy in Melbourne: Actual and optimal densities.
Journal of Industrial Economics 41, 403–419.
WHO/HAI (2011). Competition policy. In: Review Series on Pharmaceutical Pricing
Policies and Interventions, WHO/HAI Project on Medicine Prices and Availability,
Working Paper 4. Geneva: World Health Organization and Health Action
International.