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The Market for High-Quality Medicine

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  • Daniel Bennett
  • Wesley Yin
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    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.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 20091.

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    Date of creation: May 2014
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    Handle: RePEc:nbr:nberwo:20091

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    References

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    1. Kamat, Vinay R. & Nichter, Mark, 1998. "Pharmacies, self-medication and pharmaceutical marketing in Bombay, India," Social Science & Medicine, Elsevier, vol. 47(6), pages 779-794, September.
    2. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
    3. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
    4. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    5. David A. Matsa, 2011. "Competition and Product Quality in the Supermarket Industry," The Quarterly Journal of Economics, Oxford University Press, vol. 126(3), pages 1539-1591.
    6. Björkman Nyqvist, Martina & Svensson, Jakob & Yanagizawa-Drott, David, 2012. "Can Good Products Drive Out Bad? Evidence from Local Markets for (Fake?) Antimalarial Medicine in Uganda," CEPR Discussion Papers 9114, C.E.P.R. Discussion Papers.
    7. Franklin Allen, 1984. "Reputation and Product Quality," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 311-327, Autumn.
    8. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
    9. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    10. Panle Jia, 2008. "What Happens When Wal-Mart Comes to Town: An Empirical Analysis of the Discount Retailing Industry," Econometrica, Econometric Society, vol. 76(6), pages 1263-1316, November.
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