Many countries have adopted different price regulations to contain pharmaceutical prices, even in markets exposed to generic competition. This column documents subtle pricing patterns in the Swedish pharmaceutical market, where consumers get full reimbursement only by buying the cheapest product (the “product of the month”) and can only purchase their prescribed medicine in the packet size specified in their prescription. While the product-of-the-month regime substantially decreased prices and expenditure per pill initially, prices per pill are 4-5 times higher in package sizes sold by monopoly producers. These firms appear to have learned to exploit quirks of the regulation to increase their market power.
Healthcare expenditure in the EU accounts for 10% of GDP (Eurostat 2025) and spending on pharmaceuticals is about one sixth of this in OECD countries (OECD 2025). Furthermore, governments and compulsory insurance schemes finance almost 60% of retail pharmaceutical expenditure (OECD 2025). Demand for pharmaceuticals is inelastic (e.g. Dubois et al. 2022) and government subsidies further weaken consumers’ incentives to respond to prices by reducing out-of-pocket expenditure. Therefore, many countries have adopted different price regulations to contain pharmaceutical prices, even in markets exposed to generic competition (Morton and Kyle 2012).
While increasingly sophisticated regulatory regimes have lowered pharmaceutical prices (Brekke et al. 2009, 2011) and expenditure per pill (Kortelainen et al. 2023), firms have also learned to adapt to them. While regulating on-patent drug prices may weaken incentives to innovate (Dubois 2025, 2026), this concern is less important once patent protection has expired and generic competition has begun. In generic markets, regulators can therefore focus more directly on reducing expenditure per dose. At the same time, tightening regulations have increased fears of reduced product availability (e.g. Lakdawalla 2018).
While generic producers formed a cartel in the US in response to competitive pressure (Clark et al. 2022, Starc and Wollman 2025), we document curious and more subtle pricing patterns in the Swedish pharmaceutical market with generic competition (Le and Toivanen 2026). Sweden adopted a product-of-the-month regime in 2009, whereby an auction is run for each active ingredient–strength–dosage form–package size combination every month and consumers get full reimbursement only by buying the cheapest product – the “product of the month”. A key to the curious pricing patterns is that consumers are not allowed to substitute across package sizes: if you are prescribed a 150-pill package, you cannot buy three 50-pill packages, even if that were cheaper.
Table 1 shows what happened in a particular market with four different package sizes (column 1). The prices per pill (column 3) are higher by a factor of 4–5 in the two package sizes with a monopoly producer than in the other two package sizes with 3–4 firms in each (column 2). Despite higher prices, the two monopoly package sizes generate one-third of sales measured in pills sold (column 4) and 70% of revenue (column 5).
Table 1 Descriptive statistics by package size, market 1
Notes: Time period: September 2011–December 2017. Target market: A particular active ingredient (ATC5), strength, dosage form. Package size: The number of pills in the package. No. of firms: The average number of firms in each package-size group. Price per pill: The sales-weighted average price per pill of each package-size group, in Swedish krona. Pill share: The market share of each package-size group in the number of pills sold over the observation period. Revenue share: The market share of each package-size group, in Swedish krona over the observation period. Data sources: TLV, IQVIA MIDAS Quarterly Sales and IQVIA Pricing.
There are two opposing theories that can explain this pricing pattern. First, as these products are close substitutes, the intense competition that would follow entry pre-emptively discourages entry, leaving some package sizes served by a monopoly producer (e.g. Dasgupta and Stiglitz 1988). The alternative story is (tacit) collusion through ‘spheres of influence’, in which firms understand that it is in their mutual interest not to enter the market of the other, even if they could (Bernheim and Whinston 1990). Throughout, we use ‘collusion’ in the economic rather than the legal sense.
We document a number of stylised facts. First, the share of markets that have a potentially collusive entry configuration at least some of the time in 2009–2017 – i.e. two firms, each a monopolist in a given package size in the same market – is relatively large, at 22%. For example, more than 40% of (monthly) observations in markets with four package sizes exhibit such a potentially collusive market structure. Second, on average, prices per pill in monopoly package sizes are 2.44 times those in competitive package sizes. Third, our reduced-form regression results imply both economically and statistically significantly higher prices in markets with a potentially collusive entry configuration, even after controlling for a number of market characteristics. Fourth, we document that firms that only operate in competitive package sizes rarely enter monopoly ones. This last fact enables us to concentrate on modelling the entry decisions of the potentially collusive firms that are monopoly providers of some package sizes.
To study these markets in more detail, we estimate a structural model of demand, supply and fixed monthly costs of entry using data from two markets with the same two potentially collusive firms (firms A and B). Our model is tailored to take into account the peculiarities of the Swedish pharmaceutical market and the product-of-the-month regulation.
The evidence suggests that in market 1, one cannot explain the observed entry configuration with non-cooperative entry decisions. In contrast, conduct is easily explained by a model of collusion where the threat of the collusive firms entering the other’s monopoly package size enables them to maintain the observed market structure throughout our observation period.
The story for market 2 is more complicated. Our analysis suggests that the observed entry configuration is not supported by non-cooperative behaviour either. However, we also observe that firms A and B only maintained the potentially collusive market structure for a few months, and firm B exited its monopoly package size. After this exit, the observed entry configuration actually aligns with an equilibrium of a non-cooperative entry game. Our interpretation is that firms A and B experimented with collusion but found it not to be profitable and abandoned it.
As the source of market power is the regulatory prohibition that one cannot substitute across package sizes, we perform a counterfactual where such substitution is partially allowed. In market 1, we allow substitution of competitively supplied eight packages of 30 pills each for a monopoly-provided 250-pill package, and the substitution of five competitively supplied packages of 100 pills each for a monopoly-provided 500-pill package. The entry configuration of the market is not affected by the counterfactual change in regulations, but prices are: we find that prices decrease for all package sizes but the smallest 30-pill package, and on average, prices decrease by over 50%.
The outcome in market 2 is quite different. In market 2, we allow the substitution of a competitively supplied 28-pill package for two monopoly-provided packages of 14 pills each, and the substitution of 2.5 competitively supplied packages of 98–100 pills each for a monopoly-provided 250-pill package. Our results suggest that were this policy implemented, both firm A and firm B would exit their monopoly package sizes, meaning that only the three competitive package sizes would be supplied. The result would be a large 150% price increase of the middle-sized 56-pill package and a significant 36% price increase in the 28–30-pill package size. Even though prices in the dominant 98–100-pill package size decrease by 2%, this is not enough to counter the price increases in the two other package sizes. As a result, average prices increase by 7%.
Our analysis shows that designing a price regulation regime that would fit all markets is difficult. While the existing evidence (Kortelainen et al. 2023) suggests that the Swedish product-of-the-month regime substantially decreased prices and expenditure per pill initially, our analysis suggests that firms have learned to utilise quirks of the regulation to their benefit and increase their market power, sometimes substantially. Our counterfactual analysis suggests that further improvements to the regulatory regime need to be carefully designed, as the price reductions that would take place in some markets may be offset by reduced competition through entry and exit decisions, resulting in higher prices in other markets.
Source : VOXeu
