The Market for High-Quality Medicine: PowerPoint Presentation, PPT - DocSlides

The Market for High-Quality Medicine: PowerPoint Presentation, PPT - DocSlides

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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: 695331

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Slide1

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

Dan Bennett, University of Chicago

Wesley Yin, UCLA and NBER

RAND Corporation

May 18, 2015

Slide2

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,

Landes

and Posner 1987)

How do private markets improve quality in the face of imperfect information and weak regulation?

Slide4

Slide5

Slide6

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

Demand

growth and organizational change

Quality improvements driven by technological and organizational changes (new systems of distribution,

vertical

integration, large investments in QC , etc.)

As

demand markets grow

,

larger

firms can exploit scale economies.

Firms that can produce

higher

quality have incentives

to

jointly produce

and signal quality (

Milgrom

& Roberts 1986)

Chains may have stronger incentive to invest in and signal quality (

Akerlof

1970;

Jin

& Leslie 2009)

Effects on incumbents is ambiguous

Competition on price/quality vs. market

segmentation

Slide7

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

markets

Plausibly

exogeneous

entry

Survey all markets (+2) before/after entry (5 stores per market)

Data collection: “secret shopper" pharmacy audit, consumer survey, pharmacy survey, customer traffic enumeration

Slide8

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

Mechanisms

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 wholesalers

Slide9

OutlineBackgroundStudy design and empirical strategyMain results on price and qualityInterpretation

Slide10

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

Retailers

Market power

Have more discretion over price/quality for non-national brands

Through longstanding relationships with wholesalers, retailers appear to develop perceptions of quality

Slide11

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.

Chain pharmacies

T

hree chains operate in Hyderabad:

MedPlus

, Apollo, and Hetero.

MedPlus

founded in 2008 and operates around 250 stores in Hyderabad.

MedPlus

pharmacies are enclosed and air conditioned

MedPlus

contracts with manufacturers to produce/sell in-house brand

MedPlus

bypasses wholesale market; buys direct from national brands

Slide12

Slide13

Got amoxicillin?

Slide14

Slide15

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.

Surveyed drugs

Ciprofloxacin and amoxicillin are two important, widely-used antibiotics

The effectiveness of antibiotics is difficult to infer

Slide16

Slide17

OutlineBackgroundStudy design and empirical strategyMain results on price and qualityInterpretation

Slide18

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 (

n

= 100) in the study.

After a baseline survey, the chain actually entered 7 markets.

Natural experiment

MedPlus

entered markets where it could obtain suitable space.

Suitable retail space opening plausible exogenous

Contextual, statistics evidence support validity of study design

Slide19

Slide20

Data CollectionComponentsPharmacy census (n = 401).Mystery shopper audit with quality testing: samples of ciprofloxacin and amoxicillin collected by high-SES and low-SES auditors (

n

= 800)

Consumer survey with shoppers and non-shoppers (

n

= 5234)

Pharmacy survey and customer traffic enumeration (

n

= 107)

Timing

Round 1: May-July 2010

Round 2: May-July 2011

Round 3: May-July 2012 (census, traffic, consumer)

Slide21

Comparing Chain to Incumbents

Slide22

Empirical StrategyModelAudit scenario s, pharmacy i

, market

m

, time

t

Market fixed effects

Time varying market demographic and health characteristics

Cameron,

Gelbach

, and Miller (2008) bootstrapped SE’s

Identification

Factors that determine entry are uncorrelated with unobserved time-varying factors that affect the outcome (e.g. demand growth)

Exogeneity

supported by contextual, statistical evidence, and tests for unobserved selection

Slide23

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

1000-1200 ft

2

on ground level facing busy commercial street

Spaces too small are large turned down

Slide24

Slide25

Slide26

No differential trends

Slide27

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

unobservables

Follow Oster (2014) and

Altonji

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 qualityInterpretation

Slide29

Slide30

Slide31

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

97 percent

in Round 2

Slide32

Slide33

Impact on Quality

Slide34

Impact on Quality

Slide35

Impact on Prices

Slide36

Robustness checks

Slide37

Robustness checks: distance and growth

Slide38

OutlineBackgroundStudy design and empirical strategyMain results on price and qualityInterpretation

Slide39

Effects not due to spillovers

Slide40

Consumer preferences

Slide41

The Market-wide ImpactMotivationBoth chain entry and the incumbent response matter for consumer welfare.The benefit of chain entry may vary across consumers

Socioeconomic heterogeneity

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 traffic

Slide42

Productivity of the Chain

Slide43

Market-wide impact

Slide44

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.

Methodology

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

Consumer perceptions

Slide46

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

Policy

In settings without an effective quality regulator, policymakers may improve drug quality by encouraging chain retailers


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