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.:
- 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.
- Rob, Rafael, 1985. "Equilibrium Price Distributions," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(3), pages 487-504, July.
- 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.
- McFadden, Daniel, 1989. "A Method of Simulated Moments for Estimation of Discrete Response Models without Numerical Integration," Econometrica, Econometric Society, Econometric Society, vol. 57(5), pages 995-1026, September.
- Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 955-69, July.
- Stahl, Dale O., 1996. "Oligopolistic pricing with heterogeneous consumer search," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 14(2), pages 243-268.
- Jeffrey R. Brown & Austan Goolsbee, 2000. "Does the Internet Make Markets More Competitive?," NBER Working Papers 7996, National Bureau of Economic Research, Inc.
- 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.
- 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.
- 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.
- Erik Brynjolfsson & Astrid Dick & Michael Smith, 2010. "A nearly perfect market?," Quantitative Marketing and Economics, Springer, Springer, vol. 8(1), pages 1-33, March.
- 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.
- 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.
- 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.
- 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.
- Sailer, Katharina, 2006.
"Searching the eBay Marketplace,"
Discussion Papers in Economics, University of Munich, Department of Economics
1234, University of Munich, Department of Economics.
- 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.
- Ian McCarthy & Rusty Tchernis, 2008. "Search Costs and Medicare Plan Choice," Caepr Working Papers, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington 2008-004, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
- repec:dgr:uvatin:0000019 is not listed on IDEAS
- repec:dgr:uvatin:2006019 is not listed on IDEAS
- Sergei Koulayev, 2008. "Estimating search with learning," Working Papers, NET Institute 08-29, NET Institute, revised Oct 2008.
- repec:dgr:uvatin:2007054 is not listed on IDEAS
- 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.
- 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.
- Jonneke Bolhaar & Bas van der Klaauw & Maarten Lindeboom, 2010. "Insurance Search and Switching Behavior," Tinbergen Institute Discussion Papers, Tinbergen Institute 10-072/3, Tinbergen Institute.
- 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.
- repec:dgr:uvatin:2010072 is not listed on IDEAS
- 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.
- 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.
- Maarten C.W. Janssen & Jose Luis Moraga-Gonzalez & Matthijs R. Wildenbeest, 2004. "Consumer Search and Oligopolistic Pricing: An Empirical Investigation," Tinbergen Institute Discussion Papers, Tinbergen Institute 04-071/1, Tinbergen Institute.
- 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.
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.