Abstract: This paper provides the first empirical evidence for the impact of the entry of chain pharmacies on competition, market structure, and pharmacy access in rural towns. Using a detailed panel dataset spanning 2000-2019 in the Midwestern United States, I document that the entries of new chain pharmacies in urban towns has led to a large decline in the number of independent pharmacies from nearby rural towns. These industry shifts contribute to a decrease in pharmacy access in rural towns, especially in towns where over 20 percent of the population is aged 65 or older. To decompose the competition effects from chain pharmacies and rival independent pharmacies, I utilize popular static game models with incomplete information. To allow for a data-driven selection of various market characteristics in pharmacy profits, I incorporate double/debiased machine learning (DML) into the estimation of static games. By leveraging the predictive performance of machine learning estimators, I find that the impact of a rival independent pharmacy on profit is 50 percent greater than that implied by existing models. In rural towns with a high elderly population ratio, the estimated model shows that chain pharmacy entries could explain 40 percent of the closures of independent pharmacies between 2000 and 2019. A subsidy policy counterfactual simulation shows that 16 percent of rural towns previously identified as having limited pharmacy access would no longer be categorized as such.
Working Paper: Horizontal Merger and Post-Entry Market Structure: Evidence from Acquisition in the Retail Pharmacy Market
Abstract: This paper provides the first causal estimates of the effects of horizontal mergers on post-entry behaviors. I study whether horizontal mergers of dominant firms reduce competition and facilitate market entry for new entrants, potentially mitigating any significant decrease in competition. The horizontal merger guidelines, issued by the Department of Justice and the Federal Trade Commission, state that regulatory agencies should evaluate whether post-merger entry would be timely, likely, and sufficient to counteract any adverse effects on competition. I evaluate post-merger entry behavior by examining the controversial horizontal merger between Walgreens and Rite Aid in 2018. Walgreens and Rite Aid held the first and third ranks in market shares, respectively. This merger raised public and antitrust concerns, as mergers between dominant firms can impair competition and reduce consumer welfare. Using a staggered difference-in-differences estimation approach, I find that horizontal mergers are associated with a 0.6-unit (17%) decrease in the total number of stores, which could decrease the competition. Furthermore, I find no causal evidence that horizontal mergers lead to new market entries by non-merging competitors. These findings challenge the assertion by merging firms that any reduction in competition from a merger would be offset by new entries. For antitrust policy, these results suggest that policymakers might need to scrutinize proposed horizontal mergers more rigorously, taking potential market entry into consideration to adequately address antitrust concerns.