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Pharmacies, Cigarettes, and Game Theory

5 days later, cigarettes will be an item of history in all CVS stores across the U.S. In this year’s February, CVS Caremark announced to voluntarily gave up selling cigarettes and all tobacco related products in all of its chains by October 1st. This was the first and only move made among national drugstore chains, namely CVS, Walgreen, and Rite Aid. As a result, it received a favorable press coverage and generated goodwill from both smokers and nonsmokers alike. However, this positive image did not come without a cost. CVS is expecting to loss $2 billion in annual revenue with the elimination of tobacco products. However, considering CVS’ outstanding revenue of $126.955 billion a year, $2billion only accounts for about 1.6% of sales. Therefore, although the loss, in terms of pure monetary value may seem to be a lot, the first mover advantage that CVS received may help to cover up, or even boost its sales through positive media coverage.

Now, here comes the interesting part: what should the remaining two national drugstore brands do? CVS already took away the first mover advantage of favorable public press, and forfeiting tobacco sales would simply result in a huge loss. If one brand voluntarily gives up selling cigarettes, all smokers will flock to the remaining one store, creating a unique advantage that will result in a significant increase in revenue for the last tobacco-selling drugstore standing.

The game, in prisoner’s dilemma terms, would look like this:

Y: Rite Aid ; X: Walgreen

Continue Sales Give Up Tobacco
Continue Sales No change from current state (Gain revenue, lose revenue w/o much favorable press coverage)
Give Up Tobacco (Lose revenue w/o favorable press coverage) Both lose sales, but no one is at relative disadvantage


Clearly, the remaining two stores do not have the incentives to be the second mover and discontinue tobacco sales. The last option is for Walgreen and Rite Aid to collude and simultaneously give up selling tobacco. Although they would both suffer a loss, this would not allow a remaining one store to benefit in concentrated cigarette sales. In the end, this might be the wisest choice as both firms may taint their images if they go against the public opinion and continue to sell tobacco products.



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September 2014