I study the transmission of pharmacy mark-ups to retail prices and the policy between retail markups and Value Added Tax (VAT) rates in Finland. My reduced form evidence demonstrates that pharmaceutical manufacturers respond to a decrease in the regulated pharmacy mark-ups by increasing their wholesale prices. I estimate a structural model of pharmaceutical supply and demand using data from the Finnish statin market. I show that only half of the decrease in the pharmacy-markup was transferred to retail prices. I also demonstrate that the government can address the increase in manufacturer revenues by increasing the VAT rate for pharmaceuticals.
