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Who Searches for Low Prices? Population Characteristics and Price Dispersion in the Market for Prescription Drugs

Author

Listed:
  • Adrienne M. Ohler

    () (Department of Economics, Illinois State University
    Montana State University)

Abstract

We 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.

Suggested Citation

  • Adrienne M. Ohler, 2011. "Who Searches for Low Prices? Population Characteristics and Price Dispersion in the Market for Prescription Drugs," Working Paper Series 20110701, Illinois State University, Department of Economics.
  • Handle: RePEc:ils:wpaper:20110701
    as

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    File URL: http://economics.illinoisstate.edu/RePec/Papers/Ohler_Smith.pdf
    File Function: First version, 2011
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    References listed on IDEAS

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    More about this item

    Keywords

    search cost; price dispersion; prescription drugs;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • I1 - Health, Education, and Welfare - - Health

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