Abstract
We study the equilibrium effects of introducing competitive bidding in drug procurement. In 2019, China introduced a competitive bidding program where drug companies bid for a prespecified procurement quantity in nine provinces. Using a difference-in-differences design, we show the program reduced average drug prices by 47.4 percent. Generic drugs won most bids and cut prices by 75.0 percent. We develop an equilibrium model to quantify the trade-off between lower prices and potential choice distortions. Competitive bidding increases consumer welfare if policymakers believe consumers should value branded and bioequivalent generic drugs equally. The program also reduced government expenditure on insurance by 19.8 percent. (JEL D44, G22, I18, L13, L65, P25, P31)
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