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The Market for High-Quality Medicine


  • Daniel Bennett
  • Wesley Yin


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.

Suggested Citation

  • Daniel Bennett & Wesley Yin, 2014. "The Market for High-Quality Medicine," NBER Working Papers 20091, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20091
    Note: DEV HC

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    References listed on IDEAS

    1. 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.
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    4. 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.
    5. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-329, March-Apr.
    6. Steven Salop, 1977. "The Noisy Monopolist: Imperfect Information, Price Dispersion and Price Discrimination," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 393-406.
    7. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
    8. 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.
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    11. 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.
    12. 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.
    13. Bate, Roger & Jin, Ginger Zhe & Mathur, Aparna, 2011. "Does price reveal poor-quality drugs? Evidence from 17 countries," Journal of Health Economics, Elsevier, vol. 30(6), pages 1150-1163.
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    Cited by:

    1. Esther Atukunda & Anne Fitzpatrick, 2015. "An Evaluation of Factors Affecting Drug Quality: Evidence from the Antimalarial Market in Uganda," Working Papers 2015_03, University of Massachusetts Boston, Economics Department.

    More about this item

    JEL classification:

    • I1 - Health, Education, and Welfare - - Health
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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