Abstract
How can quality be improved in markets in developing countries, which are known to be plagued by substandard and counterfeit ("fake", in short) products? We study the market for antimalarial drugs in Uganda, where we randomly assign entry of a retailer (non-governmental organization (NGO)) providing a superior product-an authentic drug priced below the market-and investigate how incumbent firms and consumers respond. We find that the presence of the NGO had economically important effects. Approximately one year after the new market actor entered, the share of incumbent firms selling fake drugs dropped by more than 50% in the intervention villages, with higher quality drugs sold at significantly lower prices. Household survey evidence further shows that the quality improvements were accompanied by consumers expecting fewer fake drugs sold by drug stores. The intervention increased use of the antimalarial drugs overall. The results are consistent with a simple model where the presence of a seller committed to high quality, as opposed to an average firm, strengthens reputational incentives for competing firms to improve quality in order to not be forced out of the market, leading to "good driving out bad".
