THE UNIVERSITY OF CHICAGO
Primary Research Focus: Industrial Organization, Applied Microeconomics
Secondary Research Focus: Household Finance, Health Economics
References:
Job Market Paper: "Causes of Retail Pharmacy Closures"
[Abstract] Recent retail pharmacy closures have raised concerns about “pharmacy deserts” and access to prescription drugs, prompting state and federal proposals to raise pharmacy dispensing margins. This paper shows that the closures stem less from declining drug profitability than from the collapse of the front-store retail business that historically cross-subsidized dispensing. Using a novel dataset linking pharmacy sales, drug prices, and consumer shopping behavior, I document that the U.S. pharmacy market comprises two business models: multi-product chain pharmacies (“chains”) that rely on consumer packaged goods (CPG) sales to offset low prescription (Rx) margins, and small independent pharmacies (“independents”) that focus almost exclusively on dispensing. I demonstrate four empirical facts: (i) exits are concentrated among chains; (ii) exits reduce displaced patients’ drug adherence only temporarily; (iii) exits concentrate where pharmacies are dense, leaving distance and driving time to the nearest pharmacy essentially unchanged; and (iv) exit rates track declining CPG sales, not falling Rx margins. Because entry and exit are forward-looking decisions that respond to total store profitability rather than the drug margin alone, I estimate a multi-category demand model that converts dispensing and front-store channels into store-level profit dollars and embed it in a dynamic model of entry and exit. The model projects that the number of pharmacies will shrink by nearly half in the long run under current market conditions. Still, because projected closures are concentrated in dense markets, the distance to the nearest pharmacy barely changes. The consumer cost is modest and borne mainly through the prices charged by surviving stores rather than by lost access. My estimates imply that restoring margins to their real-terms peak would cost $30 billion per year, while recovering only a tenth of the decline and returning about one cent of consumer surplus per public dollar.