Retail union and regional first mover advantages

Abstract

An incentive for manufacturers to avoid federal sales tax on inter-state sale of goods coupled with a powerful retailers’ union resulted in India’s multilayered pharmaceutical drug distribution system. The union of retailers, AIOCD, tightly controls entry, slotting, margins, discounts, and other aspects of drug distribution and sale across regions in India. The AIOCD also leads unilateral retaliatory boycotts of drug manufacturers with lower trade margins and wholesalers aligned with parallel trade unions. We use AIOCD’s own unusually rich data and exploit variation in regional entry order across geographic markets for new pharmaceuticals to quantify regional differences in first mover advantages and the effectiveness of margins and discounts as mechanisms to overcome disadvantages of late entry. Our preliminary results indicate that considerable differences exist among regional entry order effects that are not easily overcome by increasing retailer margins or providing discounts. Earlier entry is also associated with more product varieties (SKUs), reflecting a shrinking product space for later entrants. We then investigate the impact of two shocks to the drug distribution system: (i) AIOCD’s retaliation against Odisha and Kerala due to parallel trade union formation in 2011 in these regions; and (ii) Competition Commission of India’s order in 2013 declaring AIOCD’s control of entry, slotting, discounts among other practices as being anticompetitive. We find using a differences-in-differences framework that fewer SKUs were introduced in Odisha and Kerala beginning 2011 relative to other states compared to before.