The Market for High-Quality Medicine: Retail Chain Entry and Drug Quality in India

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Daniel Bennett - University of Chicago || Wesley Yin - UCLA

November 17, 2014

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
can play an important role translating greater demand into higher quality.