The Market for High-Quality Medicine: PowerPoint Presentation, PPT - DocSlides
Retail Chain Entry and Drug Quality in India. Dan Bennett, University of Chicago. Wesley Yin, UCLA and NBER. RAND Corporation. May 18, 2015. Motivation. Heterogeneous and uncertain drug quality. Counterfeits and substandard drugs pervasive in dev. countries. ID: 695331Direct Link: Embed code:
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Presentations text content in The Market for High-Quality Medicine:
The Market for High-Quality Medicine:Retail Chain Entry and Drug Quality in India
Dan Bennett, University of Chicago
Wesley Yin, UCLA and NBER
May 18, 2015Slide2
MotivationHeterogeneous and uncertain drug qualityCounterfeits and substandard drugs pervasive in dev. countriesSmall producers manufacture generic drugs with little oversight
Health and economic impacts
Inadequate treatment, toxicities, drug resistance
Effective medicine and human capital accumulation, labor supply, earnings (Miguel and Kremer 2004, Baird et al. 2012).Slide3
MotivationLink between growth and provision of drug qualityHow does income growth translate to provision of quality?
Role of income growth
Normal good, consumers demand higher-quality medicine
Production of high quality medicine exhibits scale economies; growth pays for organizational changes
Allows for stronger legal institutions/tort law enforcement, fosters higher product quality (Spence 1977,
and Posner 1987)
How do private markets improve quality in the face of imperfect information and weak regulation?Slide4Slide5Slide6
This StudyChain store pharmacy forms, enters Indian retail market(High quality) chain’s formation is a response to increased demand
It’s entry punctuates equilibria in local markets
growth and organizational change
Quality improvements driven by technological and organizational changes (new systems of distribution,
integration, large investments in QC , etc.)
demand markets grow
firms can exploit scale economies.
Firms that can produce
quality have incentives
and signal quality (
& Roberts 1986)
Chains may have stronger incentive to invest in and signal quality (
& Leslie 2009)
Effects on incumbents is ambiguous
Competition on price/quality vs. market
Study DesignNatural experiment designMedPlus is a new pharmacy chain with integrated distribution, contract manufacturing, ostensibly high quality, lower pricesIn 2010, chain execs identified 18 candidate markets in Hyderabad to enterAppropriate retail space opened up in 7 of 18 candidate
Survey all markets (+2) before/after entry (5 stores per market)
Data collection: “secret shopper" pharmacy audit, consumer survey, pharmacy survey, customer traffic enumerationSlide8
Summary of FindingsMain resultsIncumbents lose customers, some exit the market.Quality at incumbents improves; prices fall (especially for non-national brands)Both high-SES and low-SES consumers/markets benefit
Consumers imperfectly perceive quality improvements
Incumbents match the chain's quality but not its prices, revealing productivity differences
Retail competition with price and quality elastic consumers
Chain entry raises awareness of quality, shifts preferences
Reject wholesale market spillovers, whereby chain entry reduces stocking of low quality drugs among wholesalersSlide9
OutlineBackgroundStudy design and empirical strategyMain results on price and qualityInterpretation
Background on Indian drug marketManufacturers250 “national" manufacturers and around 8000 small “local" manufacturersLimited regulatory oversight, particularly for local manufacturers
The supply chain
Mom-and-pop pharmacies buy from a complicated supply chain
Have more discretion over price/quality for non-national brands
Through longstanding relationships with wholesalers, retailers appear to develop perceptions of qualitySlide11
Retail Pharmacies in Hyderabad IncumbentsSmall single-enterprise “mom and pop" pharmacies compete locally on price and quality.Study markets have a median of 24 pharmacies/km2The median pharmacy occupies 350 square feet of space.
13% of incumbents have air conditioning and 15% have a door.
hree chains operate in Hyderabad:
, Apollo, and Hetero.
founded in 2008 and operates around 250 stores in Hyderabad.
pharmacies are enclosed and air conditioned
contracts with manufacturers to produce/sell in-house brand
bypasses wholesale market; buys direct from national brandsSlide12Slide13
Background on drug qualityDeterminants of drug qualityQuality control during the manufacturing process.Proper handling and storage during distribution and while on shelf.Procuring ingredients is not a major quality constraint
Indian Pharmacopeia standard
Active ingredient concentration, uniformity, and dissolution.
A sample is substandard if it fails in any dimension.
In our data, most substandard samples fail the active ingredient requirement.
Ciprofloxacin and amoxicillin are two important, widely-used antibiotics
The effectiveness of antibiotics is difficult to inferSlide16Slide17
OutlineBackgroundStudy design and empirical strategyMain results on price and qualityInterpretationSlide18
Study DesignLogisticsIn 2010, the chain identified 18 candidate entry marketsWe added 2 slightly lower income marketsBased on our pharmacy census, we enrolled 5 pharmacies per market (
= 100) in the study.
After a baseline survey, the chain actually entered 7 markets.
entered markets where it could obtain suitable space.
Suitable retail space opening plausible exogenous
Contextual, statistics evidence support validity of study designSlide19Slide20
Data CollectionComponentsPharmacy census (n = 401).Mystery shopper audit with quality testing: samples of ciprofloxacin and amoxicillin collected by high-SES and low-SES auditors (
Consumer survey with shoppers and non-shoppers (
Pharmacy survey and customer traffic enumeration (
Round 1: May-July 2010
Round 2: May-July 2011
Round 3: May-July 2012 (census, traffic, consumer)Slide21
Comparing Chain to IncumbentsSlide22
Empirical StrategyModelAudit scenario s, pharmacy i
Market fixed effects
Time varying market demographic and health characteristics
, and Miller (2008) bootstrapped SE’s
Factors that determine entry are uncorrelated with unobserved time-varying factors that affect the outcome (e.g. demand growth)
supported by contextual, statistical evidence, and tests for unobserved selectionSlide23
IdentificationCandidate markets limited to middle income markets250 stores in Hyderabad, relatively wealthier areasFinal expansion to a few middle income markets; did not consider slightly less affluent neighborhoods18 markets chosen on basis of income; relatively more homogenous, limiting potential for selection into treatment on unobserved SES
Entry depending on vagaries of thin real estate market
The chain had very specific space requirements and a short window for final expansion in Hyderabad
on ground level facing busy commercial street
Spaces too small are large turned downSlide24Slide25Slide26
No differential trendsSlide27
Ex-post validationEffect sizes large relative to variation in key SES variablesMarket average income would need to more than double in treatment markets to generate treatment effectsEducation levels would need to increase by 5 years (50%)
Bounds on selection on
Follow Oster (2014) and
et al. (2005) to bound extent of unobservable selection needed to generate effects spuriously
Under assumption of proportional selection, unobserved selection would have to be implausibly large
Chains have subsequently entered 9 control markets.Slide28
OutlineBackgroundStudy design and empirical strategyMain results on price and qualityInterpretationSlide29Slide30Slide31
Secular quality trendClimateHumidity and temperature are key determinants of quality, especially for these antibiotics.Water molecules necessary for molecular breakdown; heat increases the rate of chemical reaction
Peak relative humidity was 8.7 points higher in Round 2 than in Round 1.
The share of audit days with both high temperature and humidity rose from 54 percent in Round 1 to
in Round 2Slide32Slide33
Impact on QualitySlide34
Impact on QualitySlide35
Impact on PricesSlide36
Robustness checks: distance and growthSlide38
OutlineBackgroundStudy design and empirical strategyMain results on price and qualityInterpretationSlide39
Effects not due to spilloversSlide40
The Market-wide ImpactMotivationBoth chain entry and the incumbent response matter for consumer welfare.The benefit of chain entry may vary across consumers
Across pharmacies: interact with average customer education.
Within pharmacies: interact with mystery shopper SES.
Modifications to the previous approach
Include observations from the chain in the regressions (+7 pharmacies).
Weight the regressions by the customer trafficSlide42
Productivity of the ChainSlide43
Is Quality ObservableConsumer InformationCompetition only leads to higher quality if quality is observable.Quality may be indirectly observable through advertising, reputation, and word of mouth.
Actual and Perceived Quality
The impact of chain entry on perceived quality.
Our consumer survey elicits perceived quality on a scale of 1-4.
The perceptions of non-shoppers are easier to interpret because of selection into the shopper sample.Slide45
ConclusionImplicationsChain entry has positive quality externality for non-chain consumers.Consumers appear to infer quality through imperfect market signalsProductive organizational technologies (e.g. chains) with scale economies and their competitive effects
On quality and prices of incumbents
Driving out less productive firms
Joint mechanism translating income growth to higher quality
Perhaps long run, single-enterprise shops exit, market will rely on competition among chains
In settings without an effective quality regulator, policymakers may improve drug quality by encouraging chain retailers