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

  • Adrienne M. Ohler


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

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    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.

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    Paper provided by Illinois State University, Department of Economics in its series Working Paper Series with number 20110701.

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    Length: 36 pages
    Date of creation: Jul 2011
    Date of revision:
    Handle: RePEc:ils:wpaper:20110701
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    1. Besancenot, Damien & Vranceanu, Radu, 2004. "Quality and price dispersion in an equilibrium search model," Journal of Economics and Business, Elsevier, vol. 56(2), pages 99-116.
    2. David Yoskowitz, 2002. "Price Dispersion and Price Discrimination: Empirical Evidence from a Spot Market for Water," Review of Industrial Organization, Springer, vol. 20(3), pages 283-289, May.
    3. 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.
    4. Debabrata Talukdar, 2008. "Cost of Being Poor: Retail Price and Consumer Price Search Differences across Inner-City and Suburban Neighborhoods," Journal of Consumer Research, University of Chicago Press, vol. 35(3), pages 457-471, 07.
    5. John McMillan & Peter B. Morgan, 1988. "Price Dispersion, Price Flexibility, and Repeated Purchasing," Canadian Journal of Economics, Canadian Economics Association, vol. 21(4), pages 883-902, November.
    6. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213.
    7. Pinelopi Koujianou Goldberg & Frank Verboven, 1998. "The Evolution of Price Dispersion in the European Car Market," NBER Working Papers 6818, National Bureau of Economic Research, Inc.
    8. Aalto-Setälä Ville, 2003. "Explaining Price Dispersion for Homogeneous Grocery Products," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 1(1), pages 1-16, February.
    9. Jennifer F. Reinganum, 1978. "A Simple Model of Equilibrium Price Dispersion," Discussion Papers 335, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    10. Goodwin, Barry K. & Grennes, Thomas & Wohlgenant, Michael K., 1990. "Testing the law of one price when trade takes time," Journal of International Money and Finance, Elsevier, vol. 9(1), pages 21-40, March.
    11. Wilde, Louis L & Schwartz, Alan, 1979. "Equilibrium Comparison Shopping," Review of Economic Studies, Wiley Blackwell, vol. 46(3), pages 543-53, July.
    12. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
    13. Dahlby, Bev & West, Douglas S, 1986. "Price Dispersion in an Automobile Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 418-38, April.
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