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von der Schulenburg, Johann-Matthias
Hodek, Jan-Marc
Year of Publication: 
Series/Report no.: 
Discussion papers // School of Economics and Management of the Hanover Leibniz University 390
The pharmacy sector in many European countries continues to be subject to strict governmental regulations. This consists - depending on the country - of regulations on ownership, business operations, opening hours, personnel, pricing, prohibiting certain sales methods (e.g. mail order), and specifying product ranges. Indeed, Germany has a particularly strong conglomeration of regulations. Specific governmental interventions on the marketplace, i.e. interventions additionally to general legislation governing the organisation of markets in terms of regulatory policy, are frequently justified as being peculiarities of the market, which actually or allegedly prevent the market mechanism from achieving optimal results. The aim of specific interventions is to eliminate the negative consequences of free competition. However, the resulting benefits always have to be offset by the costs of regulation. These costs consist first of direct costs due to the regulation itself, since they restrict the freedom of potential suppliers and/or customers. Secondly, they have indirect welfare effects, referred to by the term excess burden. This can be illustrated by the example of taxation: taxes are used to fund the affairs of the country. However, they place a direct burden on the taxpayers, but they also cause taxpayers to adapt, e.g. by being less willing to work, thereby costing the national economy the excess burden. This study analyses these benefits and costs of regulation in the German pharmacy sector. It then describes the deregulation measures needed to avoid regulation-costs to the national economy. The main outcome lies in the conclusion that partial deregulation is capable of improving efficiency and quality in drug distribution. Based on the principle of value for money, quality improves with a given investment in drug distribution. In contrast to the present situation, Germany could be a pioneer with regard to the regulation of the pharmacy sector, focusing on the interests of consumers and patients - and not just on particular interests specific to the profession. On basis of economic theory of production and transaction-cost regarding economies of scale and economics of scope as well as on basis of welfare economics regarding oligopoly models, this analysis is coming to the result that particularly ownership and management regulations of German pharmacy sector are not only obsolete, but impose high costs on society. Together with a partial relaxation in the field of business operations and product ranges - in this part less regulatory interventions and thus the power of free competition can cause at least the same results as the present strong regulation. And this without raising a danger for customers - a wide deregulation can develop positive economic effects. Additional or even stronger effects will be possible, if price regulations and mail-order-regulations are deregulated, too. However, the analysis also shows that not every regulatory measure in the pharmacy sector should be discarded. This includes pharmacy-only and prescription-only rules, the duty that a pharmacy must be managed by a pharmacist (which must be distinguished from the ownership of a dispensary) and some of the business regulations as well as minimum opening hours. Economic potential can be realised by allowing more competition in the pharmacy sector. The more of mentioned deregulation can be realised, the larger positive economic effects can be attained. Long-term consequence of initiated trial and discovery procedures with different concepts of vertical or horizontal cooperation could be a coexistence of owner-operated pharmacies and those owned by larger joint-stock companies, which increases national welfare by meeting society-s preferences.
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Working Paper

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