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An Empirical Model of Heterogeneous Consumer Search for Retail Prescription Drugs

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  • Alan T. Sorensen

Abstract

This 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.

Suggested Citation

  • Alan T. Sorensen, 2001. "An Empirical Model of Heterogeneous Consumer Search for Retail Prescription Drugs," NBER Working Papers 8548, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8548
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    References listed on IDEAS

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    1. Stahl, Dale O., 1996. "Oligopolistic pricing with heterogeneous consumer search," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 243-268.
    2. Rafael Rob, 1985. "Equilibrium Price Distributions," Review of Economic Studies, Oxford University Press, vol. 52(3), pages 487-504.
    3. 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 609-632, November.
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    5. Jeffrey R. Brown & Austan Goolsbee, 2000. "Does the Internet Make Markets More Competitive?," NBER Working Papers 7996, National Bureau of Economic Research, Inc.
    6. 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.
    7. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
    8. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
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    Citations

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    Cited by:

    1. Sailer, Katharina, 2006. "Searching the eBay Marketplace," Discussion Papers in Economics 1234, University of Munich, Department of Economics.
    2. Bolhaar, Jonneke & Lindeboom, Maarten & van der Klaauw, Bas, 2010. "Insurance Search and Switching Behavior," CEPR Discussion Papers 7942, C.E.P.R. Discussion Papers.
    3. 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.
    4. Carvalho, M., 2011. "Essays in behavioral microeconomic theory," Other publications TiSEM 97fbb10e-5f12-420b-b8c4-e, Tilburg University, School of Economics and Management.
    5. 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.
    6. Florencia Borrescio, 2014. "Can Walmart make us healthier? The effect of Market Forces on Health Care Utilization," Working Papers wp_042, Adolfo Ibáñez University, School of Government.
    7. 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.
    8. Erik Brynjolfsson & Astrid Dick & Michael Smith, 2010. "A nearly perfect market?," Quantitative Marketing and Economics (QME), Springer, vol. 8(1), pages 1-33, March.
    9. Maarten C.W. Janssen & Jose Luis Moraga-Gonzalez & Matthijs R. Wildenbeest, 2004. "Consumer Search and Oligopolistic Pricing: An Empirical Investigation," Tinbergen Institute Discussion Papers 04-071/1, Tinbergen Institute.
    10. Baohong Sun, 2006. "—Dynamic Structural Consumer Models and Current Marketing Issues," Marketing Science, INFORMS, vol. 25(6), pages 625-628, 11-12.
    11. 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.
    12. Ian M. McCarthy & Rusty Tchernis, 2010. "Search costs and Medicare plan choice," Health Economics, John Wiley & Sons, Ltd., vol. 19(10), pages 1142-1165.
    13. 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, issue Nov, pages 643-666.
    14. Jason Allen & Robert Clark & Jean-Fran?ois Houde, 2014. "The Effect of Mergers in Search Markets: Evidence from the Canadian Mortgage Industry," American Economic Review, American Economic Association, vol. 104(10), pages 3365-3396, October.
    15. Borrescio-Higa, Florencia, 2015. "Can Walmart make us healthier? Prescription drug prices and health care utilization," Journal of Health Economics, Elsevier, vol. 44(C), pages 37-53.
    16. Sergei Koulayev, 2008. "Estimating search with learning," Working Papers 08-29, NET Institute, revised Oct 2008.
    17. 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 09/14, HEDG, c/o Department of Economics, University of York.

    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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