A study measures the cost of lack of competition

 

THAT COMPETITION keeps prices down is well known. But it is hard to measure by just how much, because prices vary for all sorts of reasons, from differences in labour costs and rents to taxes. Rising to the challenge is a new paper in The Economic Journal by Giacomo Calzolari, Andrea Ichino, Francesco Manaresi and Viki Nellas, economists at the European University Institute, Bologna University and the Italian central bank. They looked at pharmacies and specifically at customers who may be particularly easy to rip off: new parents.

Using data for 2007 to 2010 covering about a fifth of pharmacies in Italy, the researchers measured the way in which prices of hygiene products for babies changed as the number of babies varied. They took advantage of a peculiar law from the 1960s, according to which municipalities with at most 7,500 people are allowed just one pharmacy (supposedly to keep the quality of services high). They compared prices in places with populations just below this threshold, and just above.

The products studied included some 3,000 varieties of shampoos, bath foams, baby wipes, creams and so on. Many are also used by adults on themselves. Some people, for example, prefer sun-cream labelled “for children” because of its high level of protection. When raising prices for these products, even a pharmacist with a monopoly must consider the risk that adult users will switch to products that are not aimed at children. But a rise in the number of babies, and hence in the fraction of buyers who are parents, could tip the scales towards price increases. By contrast, the pharmacist should already be charging as much as parents are willing to pay for products without adult users, such as nappies.

The scholars found that pharmacists raised prices when there were more new parents—but only in municipalities with a single pharmacy, and not for nappies. In monopoly areas a doubling of the number of babies from one month to the next (not unusual in a small population) coincided with a 5% increase in the price of the basket of baby-hygiene products.

The study is timely. Italy’s government has started to loosen some of the many restrictions that stifle competition in the pharmacy sector (though not yet the one that the researchers relied on). But such regulations are plentiful in many other lines of business, and not just in Italy. The consumers who pay the price are often those who find it hardest to travel to shop around—for example, people with crying babies on their hands.

This article appeared in the Finance and economics section of the print edition under the headline “A remedy for high prices”