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An Empirical Model of Heterogeneous Consumer Search for Retail Prescription Drugs

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  • Alan T. Sorensen
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    Abstract

    This paper uses detailed data on retail pharmacy transactions to make inferences about the nature and intensity of consumer search for prescription drugs. Prescription prices exhibit patterns that should, in principle, induce search: in particular, prices vary widely across stores, and stores' price rankings are inconsistent across drugs (so the low-price pharmacy is different for one prescription vs. another). Estimates from a model of pharmacy choice suggest that search intensities are generally low: I estimate that for a typical prescription, the fraction of consumers that price-shops is approximately 5-10 percent. However, variation in this estimated search intensity across drugs is substantial and appears to be consistent with explanations based on rational search; for instance, price-shopping is more prevalent for maintenance medications than for one-time purchases, presumably because the benefits of finding a low price are magnified for prescriptions that are purchased repeatedly. Under some relatively strong assumptions imposed by the empirical model, the data also identify parameters of a search cost distribution, suggesting that the cost of conducting an exhaustive price search is approximately $15 for the average consumer.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8548.

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    Date of creation: Oct 2001
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    Handle: RePEc:nbr:nberwo:8548

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    References

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    1. Alan T. Sorensen, 2000. "Equilibrium Price Dispersion in Retail Markets for Prescription Drugs," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(4), pages 833-862, August.
    2. Rob, Rafael, 1985. "Equilibrium Price Distributions," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(3), pages 487-504, July.
    3. Daniel McFadden, 1987. "A Method of Simulated Moments for Estimation of Discrete Response Models Without Numerical Integration," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 464, Massachusetts Institute of Technology (MIT), Department of Economics.
    4. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 955-69, July.
    5. Stahl, Dale O., 1996. "Oligopolistic pricing with heterogeneous consumer search," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 14(2), pages 243-268.
    6. Jeffrey R. Brown & Austan Goolsbee, 2000. "Does the Internet Make Markets More Competitive?," NBER Working Papers 7996, National Bureau of Economic Research, Inc.
    7. John Geweke & Michael Keane & David Runkle, 1994. "Alternative computational approaches to inference in the multinomial probit model," Staff Report, Federal Reserve Bank of Minneapolis 170, Federal Reserve Bank of Minneapolis.
    8. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, American Economic Association, vol. 79(4), pages 700-712, September.
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    Citations

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    Cited by:
    1. Erik Brynjolfsson & Astrid Dick & Michael Smith, 2010. "A nearly perfect market?," Quantitative Marketing and Economics, Springer, Springer, vol. 8(1), pages 1-33, March.
    2. Bolhaar J & Lindeboom M & van der Klaauw B, 2009. "Insurance Search and Switching Behaviour at the time of the Dutch Health Insurance Reform," Health, Econometrics and Data Group (HEDG) Working Papers, HEDG, c/o Department of Economics, University of York 09/14, HEDG, c/o Department of Economics, University of York.
    3. Jason Allen & Robert Clark & Jean-François Houde, 2013. "The Effect of Mergers in Search Market: Evidence from the Canadian Mortgage Industry," NBER Working Papers 19126, National Bureau of Economic Research, Inc.
    4. Jason Allen & Robert Clark & Jean-François Houde, 2014. "Search Frictions and Market Power in Negotiated Price Markets," NBER Working Papers 19883, National Bureau of Economic Research, Inc.
    5. Emin M. Dinlersoz & Rubén Hernández-Murillo & Han Li & Roger Sherman, 2008. "Drug prices under the medicare drug discount card program," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Nov, pages 643-666.
    6. Sailer, Katharina, 2006. "Searching the eBay Marketplace," Discussion Papers in Economics, University of Munich, Department of Economics 1234, University of Munich, Department of Economics.
    7. Ian M. McCarthy & Rusty Tchernis, 2010. "Search costs and Medicare plan choice," Health Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 19(10), pages 1142-1165.
    8. repec:dgr:uvatin:0000019 is not listed on IDEAS
    9. repec:dgr:uvatin:2006019 is not listed on IDEAS
    10. Sergei Koulayev, 2008. "Estimating search with learning," Working Papers, NET Institute 08-29, NET Institute, revised Oct 2008.
    11. repec:dgr:uvatin:2007054 is not listed on IDEAS
    12. Adriana Lleras-Muney & Frank R. Lichtenberg, 2002. "The Effect of Education on Medical Technology Adoption: Are the More Educated More Likely to Use New Drugs," NBER Working Papers 9185, National Bureau of Economic Research, Inc.
    13. Bolhaar, Jonneke & Lindeboom, Maarten & van der Klaauw, Bas, 2010. "Insurance Search and Switching Behavior," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7942, C.E.P.R. Discussion Papers.
    14. Maarten C.W. Janssen & Jose Luis Moraga-Gonzalez, 2007. "On Mergers in Consumer Search Markets," Tinbergen Institute Discussion Papers, Tinbergen Institute 07-054/1, Tinbergen Institute.
    15. repec:dgr:uvatin:2010072 is not listed on IDEAS
    16. Jose Luis Moraga-Gonzalez & Matthijs R. Wildenbeest, 0000. "Maximum Likelihood Estimation of Search Costs," Tinbergen Institute Discussion Papers, Tinbergen Institute 06-019/1, Tinbergen Institute.
    17. Maarten C. W. Janssen & José Luis Moraga-González & Matthijs R. Wildenbeest, 2004. "Consumer Search and Oligopolistic Pricing: An Empirical Investigation," CESifo Working Paper Series 1292, CESifo Group Munich.
    18. Robert Clark & Jason Allen & Jean-Francois Houde, 2010. "Price negotiation in differentiated product markets: An analysis of the market for insured mortgages in Canada," 2010 Meeting Papers, Society for Economic Dynamics 1072, Society for Economic Dynamics.

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