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To Charge or Not to Charge: Evidence from a Health Products Experiment in Uganda

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Author Info

  • Greg Fischer

    ()
    (London School of Economics)

  • Dean Karlan

    ()
    (Economic Growth Center, Yale University)

  • Margaret McConnell

    ()
    (Harvard University)

  • Pia Raffler

    ()
    (Yale University)

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    Abstract

    Pricing policy for any experience good faces a key tradeoff. On the one hand, a price reduction increases immediate demand and hence more people learn about the product. On the other hand, lower prices may serve as price anchors and, through a comparison effect, decrease subsequent demand. This tension is particularly important for the distribution of health products in low-income countries, where free or heavily subsidized distribution is a common but controversial practice. Based on a model combining the learning aspect of experience goods with reference-dependent preferences, we set up a field experiment in Northern Uganda in which three health products differing in their scope for learning were initially offered either for free or for sale at market prices. In line with prior studies, when the product has potential for positive learning, we do not find an effect of free distribution on future demand. However, for products without scope for positive learning, we find evidence of price anchors: future demand is lower after a free distribution than after a distribution at market prices.

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    Bibliographic Info

    Paper provided by Economic Growth Center, Yale University in its series Working Papers with number 1041.

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    Length: 57 pages
    Date of creation: May 2014
    Date of revision:
    Handle: RePEc:egc:wpaper:1041

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    Related research

    Keywords: subsidies; health; pricing; learning;

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    References

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    1. Zacharias Maniadis & Fabio Tufano & John List, 2013. "One Swallow Does not Make a Summer: New Evidence on Anchoring Effects," Levine's Working Paper Archive 786969000000000824, David K. Levine.
    2. Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 121(4), pages 1133-1165, November.
    3. Drew Fudenberg & David K. Levine & Zacharias Maniadis, 2012. "On the Robustness of Anchoring Effects in WTP and WTA Experiments," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 131-45, May.
    4. Mayhew, Glenn E & Winer, Russell S, 1992. " An Empirical Analysis of Internal and External Reference Prices Using Scanner Data," Journal of Consumer Research, University of Chicago Press, vol. 19(1), pages 62-70, June.
    5. Ashraf, Nava & Jack, B. Kelsey & Kamenica, Emir, 2013. "Information and subsidies: Complements or substitutes?," Journal of Economic Behavior & Organization, Elsevier, vol. 88(C), pages 133-139.
    6. Winer, Russell S, 1986. " A Reference Price Model of Brand Choice for Frequently Purchased Products," Journal of Consumer Research, University of Chicago Press, vol. 13(2), pages 250-56, September.
    7. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    8. Carl Shapiro, 1983. "Optimal Pricing of Experience Goods," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 497-507, Autumn.
    9. J. Miguel Villas-Boas, 2004. "Consumer Learning, Brand Loyalty, and Competition," Marketing Science, INFORMS, vol. 23(1), pages 134-145, December.
    10. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
    11. Jessica Cohen & Pascaline Dupas, 2010. "Free Distribution or Cost-Sharing? Evidence from a Randomized Malaria Prevention Experiment," The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 1-45, February.
    12. Adaval, Rashmi & Monroe, Kent B, 2002. " Automatic Construction and Use of Contextual Information for Product and Price Evaluations," Journal of Consumer Research, University of Chicago Press, vol. 28(4), pages 572-88, March.
    13. G. Dekimpe, Marnik & Hanssens, Dominique M. & Silva-Risso, Jorge M., 1998. "Long-run effects of price promotions in scanner markets," Journal of Econometrics, Elsevier, vol. 89(1-2), pages 269-291, November.
    14. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
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