IDEAS home Printed from https://ideas.repec.org/p/ils/wpaper/20110701.html
   My bibliography  Save this paper

Who Searches for Low Prices? Population Characteristics and Price Dispersion in the Market for Prescription Drugs

Author

Listed:
  • Adrienne M. Ohler

    (Department of Economics, Illinois State University
    Montana State University)

Abstract

We examine the relationship between population characteristics and price dispersion for 75 prescription drugs in five markets. Based on models of price dispersion, we consider that search costs are likely lower for the elderly, who are repeat purchasers. Expected benefits from search are likely higher for low income households, who lack insurance. Our results are consistent with the hypothesis that for communities with a large percentage of elderly and poor population, search effort is greater for pharmaceutical drugs, causing lower price dispersion. By understanding the characteristics of who searches for low drug prices, we begin to identify the motives of consumers that might also lead to search for the lowest cost healthcare provider or lowest cost insurance. The results suggest that the 2004 Medicare legislation that closed the pharmaceutical donut hole may have reduced search by the elderly, increased price dispersion, and potentially increased the average price of prescription drugs.

Suggested Citation

  • Adrienne M. Ohler, 2011. "Who Searches for Low Prices? Population Characteristics and Price Dispersion in the Market for Prescription Drugs," Working Paper Series 20110701, Illinois State University, Department of Economics.
  • Handle: RePEc:ils:wpaper:20110701
    as

    Download full text from publisher

    File URL: http://economics.illinoisstate.edu/RePec/Papers/Ohler_Smith.pdf
    File Function: First version, 2011
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Steven Salop & Joseph Stiglitz, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 493-510.
    2. David Yoskowitz, 2002. "Price Dispersion and Price Discrimination: Empirical Evidence from a Spot Market for Water," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 20(3), pages 283-289, May.
    3. Besancenot, Damien & Vranceanu, Radu, 2004. "Quality and price dispersion in an equilibrium search model," Journal of Economics and Business, Elsevier, vol. 56(2), pages 99-116.
    4. Stigler, George J., 2011. "Economics of Information," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 5, pages 35-49.
    5. Pinelopi Koujianou Goldberg & Frank Verboven, 2001. "The Evolution of Price Dispersion in the European Car Market," Review of Economic Studies, Oxford University Press, vol. 68(4), pages 811-848.
    6. Dahlby, Bev & West, Douglas S, 1986. "Price Dispersion in an Automobile Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 418-438, April.
    7. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
    8. Reinganum, Jennifer F, 1979. "A Simple Model of Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 851-858, August.
    9. Debabrata Talukdar, 2008. "Cost of Being Poor: Retail Price and Consumer Price Search Differences across Inner-City and Suburban Neighborhoods," Journal of Consumer Research, Oxford University Press, vol. 35(3), pages 457-471, July.
    10. Fiona Morton & Florian Zettelmeyer & Jorge Silva-Risso, 2003. "Consumer Information and Discrimination: Does the Internet Affect the Pricing of New Cars to Women and Minorities?," Quantitative Marketing and Economics (QME), Springer, vol. 1(1), pages 65-92, March.
    11. Louis L. Wilde & Alan Schwartz, 1979. "Equilibrium Comparison Shopping," Review of Economic Studies, Oxford University Press, vol. 46(3), pages 543-553.
    12. Alan T. Sorensen, 2000. "Equilibrium Price Dispersion in Retail Markets for Prescription Drugs," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 833-862, August.
    13. Aalto-Setälä Ville, 2003. "Explaining Price Dispersion for Homogeneous Grocery Products," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 1(1), pages 1-16, February.
    14. John McMillan & Peter B. Morgan, 1988. "Price Dispersion, Price Flexibility, and Repeated Purchasing," Canadian Journal of Economics, Canadian Economics Association, vol. 21(4), pages 883-902, November.
    15. Goodwin, Barry K. & Grennes, Thomas & Wohlgenant, Michael K., 1990. "Testing the law of one price when trade takes time," Journal of International Money and Finance, Elsevier, vol. 9(1), pages 21-40, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Adrienne Ohler & Vincent Smith, 2013. "Population Characteristics And Price Dispersion In The Market For Prescription Drugs," Contemporary Economic Policy, Western Economic Association International, vol. 31(3), pages 486-502, July.
    2. C. Yiu & S. Wong & K. Chau, 2009. "Transaction Volume and Price Dispersion in the Presale and Spot Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 38(3), pages 241-253, April.
    3. Xing Zhang & Tat Y. Chan & Ying Xie, 2018. "Price Search and Periodic Price Discounts," Management Science, INFORMS, vol. 64(2), pages 495-510, February.
    4. Alfredo Martín-Oliver & Vicente Salas-Fumás & Jesús Saurina, 2005. "Interest rate dispersion in deposit and loan markets," Working Papers 0506, Banco de España.
    5. Luttmann, Alexander & Gaggero, Alberto A, 2022. "How does COVID-19 affect intertemporal price dispersion? Evidence from the airline industry," MPRA Paper 111797, University Library of Munich, Germany.
    6. Byrne, David P. & Martin, Leslie A., 2021. "Consumer search and income inequality," International Journal of Industrial Organization, Elsevier, vol. 79(C).
    7. Joshua Sherman & Avi Weiss, 2017. "On Fruitful And Futile Tests Of The Relationship Between Search And Price Dispersion," Economic Inquiry, Western Economic Association International, vol. 55(4), pages 1898-1918, October.
    8. Greg Kaplan & Guido Menzio & Leena Rudanko & Nicholas Trachter, 2019. "Relative Price Dispersion: Evidence and Theory," American Economic Journal: Microeconomics, American Economic Association, vol. 11(3), pages 68-124, August.
    9. George Alessandria, 2005. "Consumer search, price dispersion, and international relative price volatility," Working Papers 05-9, Federal Reserve Bank of Philadelphia.
    10. Jason R. Blevins & Garrett T. Senney, 2019. "Dynamic selection and distributional bounds on search costs in dynamic unit‐demand models," Quantitative Economics, Econometric Society, vol. 10(3), pages 891-929, July.
    11. Kenneth Gillingham, Hao Deng, Ryan Wiser, Naim Darghouth, Gregory Nemet, Galen Barbose, Varun Rai, and Changgui Dong, 2016. "Deconstructing Solar Photovoltaic Pricing," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    12. Cason, Timothy N. & Friedman, Daniel, 2003. "Buyer search and price dispersion: a laboratory study," Journal of Economic Theory, Elsevier, vol. 112(2), pages 232-260, October.
    13. Sebnem Bahadir-Lust & Jens-Peter Loy & Christoph R. Weiss, 2007. "Are they always offering the lowest price? An empirical analysis of the persistence of price dispersion in a low inflation environment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 777-788.
    14. Backus, Matthew R. & Podwol, Joseph Uri & Schneider, Henry S., 2014. "Search costs and equilibrium price dispersion in auction markets," European Economic Review, Elsevier, vol. 71(C), pages 173-192.
    15. Anania, Giovanni & Nisticò, Rosanna, 2014. "Price dispersion and seller heterogeneity in retail food markets," Food Policy, Elsevier, vol. 44(C), pages 190-201.
    16. repec:smu:ecowpa:1301 is not listed on IDEAS
    17. Yuriy Gorodnichenko, 2007. "Using Firm Optimization to Evaluate and Estimate Returns to Scale," NBER Working Papers 13666, National Bureau of Economic Research, Inc.
    18. Jeffrey R. Brown & Austan Goolsbee, 2002. "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 481-507, June.
    19. Anania, Giovanni & Nistico, Rosanna, 2012. "Price dispersion, search costs and consumers and sellers heterogeneity in retail food markets," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 125594, International Association of Agricultural Economists.
    20. Alfredo Martin-Oliver & Vicente Salas-Fumas & Jesús Saurina, 2008. "Search Cost and Price Dispersion in Vertically Related Markets: The Case of Bank Loans and Deposits," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 33(4), pages 297-323, December.
    21. Mitchell Berlin & Loretta J. Mester, 2004. "Credit card rates and consumer search," Review of Financial Economics, John Wiley & Sons, vol. 13(1-2), pages 179-198.

    More about this item

    Keywords

    search cost; price dispersion; prescription drugs;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • I1 - Health, Education, and Welfare - - Health

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ils:wpaper:20110701. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: B. Andrew Chupp (email available below). General contact details of provider: http://economics.illinoisstate.edu .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.