Competitive Bidding in Drug Procurement: Evidence from China

We study the impact of competitive bidding in the procurement of off-patent drugs. In 2019, China introduced competitive bidding with a quantity guarantee for thirty-one molecules in nine provinces. Using a difference-in-difference design, we show that the program reduced average drug prices by 47.4%. Generic drug firms won the majority of the bids and on average cut prices by 59.4%. We develop a model of demand and supply to quantify the trade-off between lower prices and choice distortions. Competitive bidding increases consumer welfare if policymakers consider brand preferences welfare irrelevant. The program also reduced government expenditures on insurance by 24.3%.