gms | German Medical Science

Background and current state of (inter)national research: The effectiveness of antibiotics is a limited resource which can either be exploited through (over-)use or destroyed through poor production standards. While the (over)use issue is well established, the impact of poor production standards came to the public debate only very recently: Competition may force pharmaceutical companies to produce in countries with lower production costs and laxer regulations. The production of antibiotics itself may then create resistant bacteria which may spread around the world, e.g. carried by infected travelers.

Research questions and objectives: Using a theoretical approach, we investigate the potential implications of an intensified competition among producers of antibiotics for firms’ location decisions, and how these decisions may affect production conditions, the prevalence of resistant bacteria, and welfare.

Methods or hypothesis: We employ a modified Cournot competition model, where n antibiotics firms produce a homogenous good. Production costs of a firm are linear in quantity, but the marginal production costs depend on the location of production. The location decision is included as a parameter between zero and one, where a higher (lower) value indicates a location with higher (lower) regulation standards and production costs. To involve the notion that poor location decisions may increase the prevalence of resistant bacteria and, thus, lower an antibiotic’s effectiveness in a stylized way, we model demand as an inverse demand function multiplied by a function representing the market size. Market size, in turn, depends positively on the location parameters chosen by the firms, implying that a location with higher (lower) cost yields a larger (smaller) market size for all firms.

Results: We investigate the effect of an increase in the degree of competition, modelled as an increase in the number of firms. The basic result obtained under all timing structures (simultaneous versus sequential production and location decisions), though with differences in magnitude, is that more competition leads to poorer location decisions and thereby to a higher prevalence of resistant bacteria. Regarding the impact on welfare, we show that there are two opposing effects: On the one hand, more intensive competition reduces the prices of antibiotics, which increases consumer surplus and welfare. On the other hand, intensified competition reduces the effectiveness of antibiotics, which decreases consumer surplus and welfare. Hence, the welfare-maximizing number of firms is lower than the number of firms under perfect competition.

Discussion: Our analysis shows that increasing competition between producers of antibiotics may have negative side effects. These should be taken into account when assessing potential positive effects of competition on prices and welfare.

Practical implications: In the light of the analysis and of current shortages, it may be worth to consider strategies to strengthen the domestic production of pharmaceutical and medical supplies.