Game Theory, Pharmacies, And Why CVS Stopped Selling Cigarettes

Recently it has been announced that the major pharmacy chain CVS will no longer sell cigarettes and other tobacco related products.  CVS will become the first retailer to fall under the mounting pressure from the Attorney Generals, although the AGs have not threatened any legal action.  CVS brought in around 127 billion dollars in revenue over the last year and is expecting to lose about 2 billion due to the lack of tobacco sales.  This loss represents a 1.6% of their total revenue and for a large corporation his is not earth shattering.  Other chains receiving pressure from AGs are Walmart, Walgreen, Kroger, Rite Aid, and SafeWay.  As suggested by the article Kroger and SafeWay are primarily supermarkets and Wal-Mart sell virtually everything, so the will be left out of the overview.  The remaining chains, Rite Aid and Walgreen, are primarily pharmacies and can be seen as direct competitors to CVS.

When CVS left the market for selling tobacco it gained the role of first mover, CVS lost a small portion of their revenue to gain the brand differentiation from two other chains.  This puts both Walgreen and Rite Aid in a situation where neither would be smart to leave the tobacco retail market.  The author stats two problems with being the second retailer to leave the market, the first is that all the goodwill and press have already been taken by CVS.  The second is that leaving the market will allow the third firm to ave the distinction of being the only firm left that sells tobacco.  Another option would be for Rite Aid and Walgreen to both drop tobacco sales as this would be the best decision each of the firms can make.  With that being said this would force these three firms into Nash equilibrium as the firms would each choose the best strategy based on the choice of the other firms.

http://www.businessinsider.com/pharmacies-cigarettes-and-game-theory-2014-3

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2 thoughts on “Game Theory, Pharmacies, And Why CVS Stopped Selling Cigarettes”

  1. This is really interesting and when I first saw CVS doing it I didn’t really think about it in terms of game theory. They took the payoff for themselves of the goodwill for less that 2% of their revenue and left the other two companies having to sell tobacco. What is interesting to me is how much additional revenue does selling tobacco gain them, if a lot of your revenue come from people buying other things in your store after they come in for cigarettes then this could ultimately hurt them. I’m sure CVS has information on that and im glad to see them making such a tactical but yet ethical strategy.

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