Who Searches for Low Prices? Population Characteristics and Price Dispersion in the Market for Prescription Drugs
AbstractWe 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.
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Bibliographic InfoPaper provided by Illinois State University, Department of Economics in its series Working Paper Series with number 20110701.
Length: 36 pages
Date of creation: Jul 2011
Date of revision:
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Web page: http://economics.illinoisstate.edu
search cost; price dispersion; prescription drugs;
Find related papers by JEL classification:
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- I1 - Health, Education, and Welfare - - Health
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-27 (All new papers)
- NEP-COM-2011-07-27 (Industrial Competition)
- NEP-HEA-2011-07-27 (Health Economics)
- NEP-HME-2011-07-27 (Heterodox Microeconomics)
- NEP-IND-2011-07-27 (Industrial Organization)
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