An article from UCLA Anderson Review outlines Affiliate Daniel Bennett and coauthor’s natural experiment to study the relationship between price and quality after the entry of a chain pharmacy in India. They found that the chain’s arrival not only led to a drop in prices at the existing independents, but that the competition spurred the small pharmacies to raise the quality of the drugs they sold.
“Small, independent drug stores dominate the pharmacy market in India. Often little more than unenclosed storefronts, they sell a wide variety of mostly generic drugs, typically without a prescription. They provide an outlet for thousands of local drug makers, and the quality of their stock can be subpar.
Increasingly, these mom-and-pop outlets face competition from expanding national chains, which offer lower prices and such amenities as air-conditioned stores and trained pharmacy staff. Economic theory is pretty clear that such competition invariably leads to lower prices, but the effect on quality is more complicated. When a grocery chain like Ralph’s enters a market, it’s easy enough for shoppers to tell which store has the best produce. Quality differences aren’t so readily apparent when it comes to drugs.
When consumers cannot infer quality readily, it may or may not be worthwhile for independent stores to invest in quality to compete. Another possibility is that stores, facing competition from a chain, would sell low-quality medications at low cost to poorer customers, while the chain would sell higher-quality drugs to affluent shoppers, resulting in a segmented market.”
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