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Demand systems and the true subindex of the cost of living for pharmaceuticals

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  • Michael Baye
  • Robert Maness
  • Steven Wiggins

Abstract

This paper investigates the demand for prescription pharmaceuticals at the retail level. We use complete demand systems to investigate elasticity for major classes of pharmaceuticals. We estimate both a regular and an inverse demand system using a differential version of the Rotterdam model. We find that both systems yield negative, and statistically significant own-price elasticities. The results indicate that pharmaceutical demand curves are not perfectly inelastic as some industry commentators suggest. We use the results of the complete demand system and a variant of a formula developed by Balk (1990) to derive a cost-of-living subindex for retail pharmaceuticals. We find that retail pharmaceutical prices using our index rise faster than wholesale prices, calculated either by the BLS or by the methods developed by Berndt et al.(1993).

Suggested Citation

  • Michael Baye & Robert Maness & Steven Wiggins, 1997. "Demand systems and the true subindex of the cost of living for pharmaceuticals," Applied Economics, Taylor & Francis Journals, vol. 29(9), pages 1179-1190.
    • Handle: RePEc:taf:applec:v:29:y:1997:i:9:p:1179-1190
    DOI: 10.1080/00036849700000009
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    References listed on IDEAS

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    1. Eales, James S. & Unnevehr, Laurian J., 1994. "The inverse almost ideal demand system," European Economic Review, Elsevier, vol. 38(1), pages 101-115, January.
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    3. Balk, Bert M, 1990. "On Calculating Cost-of-Living Index Numbers for Arbitrary Income Levels," Econometrica, Econometric Society, vol. 58(1), pages 75-92, January.
    4. Barten, A. P. & Bettendorf, L. J., 1989. "Price formation of fish : An application of an inverse demand system," European Economic Review, Elsevier, vol. 33(8), pages 1509-1525, October.
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    Cited by:

    1. Filippini, M. & Masiero, G. & Moschetti, K., 2009. "Regional consumption of antibiotics: A demand system approach," Economic Modelling, Elsevier, vol. 26(6), pages 1389-1397, November.
    2. L. G. González Ortiz & G. Masiero, 2013. "Disentangling spillover effects of antibiotic consumption: a spatial panel approach," Applied Economics, Taylor & Francis Journals, vol. 45(8), pages 1041-1054, March.
    3. John B. Horowitz & H. Brian Moehring, 2014. "How Economic Development Affects Antibiotic Resistance," Journal for Economic Educators, Middle Tennessee State University, Business and Economic Research Center, vol. 14(1), pages 58-77, Fall.
    4. Niklas Rudholm, 2003. "Competition and substitutability in the Swedish pharmaceuticals market," Applied Economics, Taylor & Francis Journals, vol. 35(14), pages 1609-1617.
    5. Filippini, M. & Heimsch, F. & Masiero, G., 2014. "Antibiotic consumption and the role of dispensing physicians," Regional Science and Urban Economics, Elsevier, vol. 49(C), pages 242-251.
    6. Elamin H. Elbasha, 2003. "Deadweight loss of bacterial resistance due to overtreatment," Health Economics, John Wiley & Sons, Ltd., vol. 12(2), pages 125-138, February.
    7. Massimo Filippini & Giuliano Masiero & Karine Moschetti, 2008. "Dispensing practices and antibiotic use," Quaderni della facoltà di Scienze economiche dell'Università di Lugano 0808, USI Università della Svizzera italiana.
    8. M. Filippini & L. Ortiz & G. Masiero, 2013. "Assessing the impact of national antibiotic campaigns in Europe," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 14(4), pages 587-599, August.
    9. Massimo Filippini & Giuliano Masiero & Karine Moschetti, 2007. "Characteristics of demand for antibiotics in primary care: an almost ideal demand system approach," Quaderni della facoltà di Scienze economiche dell'Università di Lugano 0701, USI Università della Svizzera italiana.
    10. Massimo Filippini & Giuliano Masiero & Karine Moschetti, 2007. "Characteristics of demand for antibiotics in primary care: an almost ideal model," Working Papers 0701, Department of Management, Information and Production Engineering, University of Bergamo.
    11. David Granlund, 2022. "The Price Effects of Competition from Parallel Imports and Therapeutic Alternatives: Using Dynamic Models to Estimate the Causal Effect on the Extensive and Intensive Margins," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 60(1), pages 63-92, February.
    12. Atella, Vincenzo, 2000. "Drug cost containment policies in Italy: are they really effective in the long-run?: The case of minimum reference price," Health Policy, Elsevier, vol. 50(3), pages 197-218, January.
    13. Filippini, Massimo & Masiero, Giuliano & Moschetti, Karine, 2006. "Socioeconomic determinants of regional differences in outpatient antibiotic consumption: Evidence from Switzerland," Health Policy, Elsevier, vol. 78(1), pages 77-92, August.
    14. Giuliano Masiero & Massimo Filippini & Matus Ferech & Herman Goossens, 2007. "Determinants of outpatient antibiotic consumption in Europe: bacterial resistance and drug prescribers," Quaderni della facoltà di Scienze economiche dell'Università di Lugano 0702, USI Università della Svizzera italiana.
    15. Massimo Filippini & Giuliano Masiero & Karine Moschetti, 2009. "Physician dispensing and antibiotic prescriptions," Quaderni della facoltà di Scienze economiche dell'Università di Lugano 0908, USI Università della Svizzera italiana.
    16. Giuliano Masiero & Massimo Filippini & Matus Ferech & Herman Goossens, 2010. "Socioeconomic determinants of outpatient antibiotic use in Europe," International Journal of Public Health, Springer;Swiss School of Public Health (SSPH+), vol. 55(5), pages 469-478, October.

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