Working Paper: NBER ID: w20091
Authors: Daniel Bennett; Wesley Yin
Abstract: This study examines the effect of chain store entry on drug quality and prices in the retail pharmacy market in Hyderabad, India. In contrast to prevailing mom-and-pop pharmacies, chains exploit scale economies to offer high-quality drugs at lower cost. With a unique data set and a natural experiment methodology, we show that chain entry leads to a relative 5 percent improvement in drug quality and a 2 percent decrease in prices at incumbent retailers. These changes do not depend on the socioeconomic status of consumers, suggesting that chain entry improves consumer welfare throughout the market. Despite the likely role of asymmetric information in this market, we show that consumers partially infer these quality improvements. Our findings suggest that in markets with asymmetric information, organizational technologies such as chains may play an important role translating greater demand into higher quality.
Keywords: drug quality; pharmacy chains; asymmetric information; consumer welfare; natural experiment
JEL Codes: I11; L15; O1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| chain entry (Y60) | drug quality (L15) |
| chain entry (Y60) | prices at incumbent retailers (L11) |
| chain entry (Y60) | quality elasticity of demand (D12) |
| chain entry (Y60) | compliance with the Pharmacopeia quality standard (L65) |
| chain entry (Y60) | prices (P22) |
| chain entry (Y60) | improvements in consumer welfare (D18) |
| retail competition driven by chain entry (L11) | quality improvements (L15) |
| retail competition driven by chain entry (L11) | price reductions (L42) |
| consumers inferring quality improvements from chain entry (L15) | effectiveness of informational signals (D83) |