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Payments, Promotion, And The Purple Pill

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  • David B. Ridley

Abstract

Understanding competition in the US drug market requires knowing how sensitive demand is to prices. The relevant prices for insured consumers are copayments. There are many studies of copayment elasticity in the health literature, but they are of limited applicability for studies of competition. Because of a paucity of data, such studies typically control for neither competitor copayment nor advertising. Whereas previous studies examined copayment sensitivity when copayments for branded drugs move in unison, this study examines copayment sensitivity when copayments diverge. This study uses unique panel data of insurance copayments and utilization for 77 insurance groups, as well as data on advertising. The results indicate that demand can be much more sensitive to copayment than previously recognized. Manufacturers selling drugs with higher copayments than branded competitors can lose substantial market share. Manufacturers can offset the loss of demand by increasing advertising to physicians, but it is costly. Copyright © 2013 John Wiley & Sons, Ltd.

Suggested Citation

  • David B. Ridley, 2015. "Payments, Promotion, And The Purple Pill," Health Economics, John Wiley & Sons, Ltd., vol. 24(1), pages 86-103, January.
    • Handle: RePEc:wly:hlthec:v:24:y:2015:i:1:p:86-103
    DOI: 10.1002/hec.3005
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    Cited by:

    1. Lee, Chung-Ying, 2020. "Pricing strategy and moral hazard: Copay coupons in pharmaceuticals," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    2. Arcidiacono, Peter & Ellickson, Paul B. & Landry, Peter & Ridley, David B., 2013. "Pharmaceutical followers," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 538-553.
    3. Terris-Prestholt, Fern & Windmeijer, Frank, 2016. "How to sell a condom? The impact of demand creation tools on male and female condom sales in resource limited settings," Journal of Health Economics, Elsevier, vol. 48(C), pages 107-120.
    4. Eisenberg, Matthew D. & Avery, Rosemary J. & Cantor, Jonathan H., 2017. "Vitamin panacea: Is advertising fueling demand for products with uncertain scientific benefit?," Journal of Health Economics, Elsevier, vol. 55(C), pages 30-44.
    5. Avi Dor & William Encinosa, 2010. "How Does Cost‐Sharing Affect Drug Purchases? Insurance Regimes in the Private Market for Prescription Drugs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(3), pages 545-574, September.
    6. Su Liu & Deborah Chollet, "undated". "Price and Income Elasticity of the Demand for Health Insurance and Health Care Services: A Critical Review of the Literature," Mathematica Policy Research Reports dbf03ba11863430593b0b825f, Mathematica Policy Research.
    7. Avi Dor & William Encinosa, 2004. "How Does Cost-Sharing Affect Drug Purchases? Insurance Regimes in the Private Market for Prescription Drugs," NBER Working Papers 10738, National Bureau of Economic Research, Inc.

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