Do Informed Consumers Reduce the Price and Prevalence of Counterfeit Drugs? Evidence from the Antimalarial Market

As in other markets with experts, healthcare markets are characterized by asymmetric information. Providers may use this information advantage to increase profits. I conduct an audit study to test whether improved customer information about healthcare purchases improves customer well-being through reducing prices and improving quality. I send pairs of covert shoppers to medical outlets in Uganda to purchase antimalarial drugs according to randomized scripts. The scripts experimentally vary information about the patient’s diagnosis (malaria) and/or about appropriate treatment (artemether-lumefantrine). I test the purchased drugs using a spectrometer to determine whether they are substandard, an objective measure of quality. I find that shoppers who know either the diagnosis or recommended treatment pay approximately $0.18 (5 percent) less. I find that measures of quality observable at the time of purchase improve: informed customers are 4 percentage points more likely to receive the correct dosage. However, I find a corresponding decrease in actual drug quality, unobservable at the time of purchase. Shoppers who know either the diagnosis or the recommended treatment are 3.4 percentage points more likely to be sold a substandard drug. I interpret results through a framework in which providers trade off the short-run profits of selling a bad drug against the effects on their reputation if they were caught. I conclude that while shoppers with more information pay lower prices, providers may also lower quality in order to maximize profits. Thus, information asymmetries are difficult to correct and and information alone is unlikely to improve drug quality. JEL: D83, I11, I15, L15, O12 ∗735 S. State St., Ann Arbor, MI, 48109. Email:[email protected]. I am grateful for financial support from the following sources: UM Department of Economics MITRE grant, National Science Foundation Dissertation Improvement Grant (#1260911), the UM Department of Afro-American and African Studies; the UM African Studies Center; the Rackham Graduate School International Research and Graduate Research Awards; the Center for Public Policy in Diverse Societies Research Grant; Center for International Business Education Research Grant; the Center for the Education of Women Research Grant. This paper does not necessarily reflect the views of the NSF or other donors. I am thankful to Kim Redic, Bob Brush, Thermo-Fisher Scientific Instruments, David Sherman, and Eli Eisman for providing technical assistance with the drug testing. I have benefited from comments from Rebecca Thornton, Jeff Smith, Steve Salant, Raj Arunachalam, Achyuta Adhvaryu, Susan Godlonton, Dusty Grundmeier, Varanya Chaubey, Ryoko Sato, Emily Beam, Desmond Toohey, Holly Painter, and seminar participants at the University of Michigan. Esther Atukunda and the entire research field staff provided essential support in implementing this project. This study received ethical approval from the UM-IRB (HUM00067957 and HUM00091197), the MUST-IRB (No. 18/09-12), and the UNCST (IS-93).