Regulated versus unregulated competition: How drug shortages boost illegal pharmacy sales

Abstract

This study examines how product shortages among legal firms create competitive opportunities for illegal firms. We analyze 713 drug shortages in the United States between 2017 and 2023 and show that shortages substantially increase illicit pharmacies’ sales of affected drugs, which rise by 40.5% during shortages and remain 32.8% higher in the six months after shortages are resolved. The effects are strongest for drugs treating chronic conditions, drugs with fewer substitutes, and drugs experiencing more intense shortages. We also find spillover effects, as illegal sales of drugs typically consumed alongside the shortage drug also increase during shortages and remain higher after shortages are resolved. This evidence underscores how regulatory constraints that limit legal firms’ flexibility create opportunities for illegal competitors to capture unmet demand. Managerial Summary We examine how product shortages reshape competition between legal and illegal firms in highly regulated markets. Looking at prescription drug shortages in the United States, we show that illicit pharmacies experience substantial and lasting increases in sales when legal firms are unable to meet demand. These gains extend beyond the drugs in shortage to related medications, indicating both direct and spillover effects. The results reveal a paradox: regulatory frameworks designed to ensure consumer safety may also restrict legal firms’ flexibility, strengthening illegal competitors. These findings highlight the importance of designing regulatory systems and supply chains that safeguard consumer safety without undermining the competitiveness of compliant firms. Coordination between regulatory policy, supply resilience, and enforcement is essential to prevent illicit actors from exploiting market disruptions.