An Empirical Model of Heterogeneous Consumer Search for Retail Prescription Drugs
AbstractThis 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8548.
Date of creation: Oct 2001
Date of revision:
Note: HC IO
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Find related papers by JEL classification:
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-10-22 (All new papers)
- NEP-DCM-2001-10-22 (Discrete Choice Models)
- NEP-HEA-2001-10-22 (Health Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Geweke, John & Keane, Michael P & Runkle, David, 1994.
"Alternative Computational Approaches to Inference in the Multinomial Probit Model,"
The Review of Economics and Statistics,
MIT Press, vol. 76(4), pages 609-32, November.
- John Geweke & Michael Keane & David Runkle, 1994. "Alternative computational approaches to inference in the multinomial probit model," Staff Report 170, Federal Reserve Bank of Minneapolis.
- Stahl, Dale O., 1996. "Oligopolistic pricing with heterogeneous consumer search," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 243-268.
- Rob, Rafael, 1985. "Equilibrium Price Distributions," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 487-504, July.
- McFadden, Daniel, 1989.
"A Method of Simulated Moments for Estimation of Discrete Response Models without Numerical Integration,"
Econometric Society, vol. 57(5), pages 995-1026, September.
- Daniel McFadden, 1987. "A Method of Simulated Moments for Estimation of Discrete Response Models Without Numerical Integration," Working papers 464, Massachusetts Institute of Technology (MIT), Department of Economics.
- Jeffrey R. Brown & Austan Goolsbee, 2000. "Does the Internet Make Markets More Competitive?," NBER Working Papers 7996, National Bureau of Economic Research, Inc.
- Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
- Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
- 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.
- Ian McCarthy & Rusty Tchernis, 2008.
"Search Costs and Medicare Plan Choice,"
Caepr Working Papers
2008-004, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
- Moraga-González, José Luis & Wildenbeest, Matthijs R., 2008.
"Maximum likelihood estimation of search costs,"
European Economic Review,
Elsevier, vol. 52(5), pages 820-848, July.
- 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.
- 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 1072, Society for Economic Dynamics.
- repec:dgr:uvatin:2010072 is not listed on IDEAS
- repec:dgr:uvatin:2007054 is not listed on IDEAS
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.