Price Controls with Imperfect Competition and Choice Frictions: Evidence from Indian Pharmaceuticals

Price control policies are often deployed in many important markets, such as healthcare. In the presence of common market failures—imperfect competition or choice frictions—the impact of such policies on market outcomes and welfare is ambiguous. We provide novel analysis of these forces in the context of a large-scale pharmaceutical price control policy in India. We find the policy lowered the prices of branded drugs by 24% and increased their sales by 36%, with minimal impact on entry, exit, and diffusion of new molecules. The standard revealed preference framework implies that the policy increased consumer surplus by 23% because it corrected monopoly distortions without disrupting supply. However, we present novel evidence that choice frictions lead consumers to overvalue expensive brands relative to cheaper alternatives of similar quality. Once we account for these frictions, we find that the consumer surplus gains are 30% smaller and that total welfare declines, as the policy unintentionally steers consumers toward costly overvalued brands. Finally, we assess how to effectively set price ceilings and evaluate alternative nonprice regulations.