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An Empirical Model of Heterogeneous Consumer Search for Retail Prescription Drugs

  • Alan T. Sorensen
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    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.

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    File URL: http://www.nber.org/papers/w8548.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8548.

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    Date of creation: Oct 2001
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    Handle: RePEc:nbr:nberwo:8548
    Note: HC IO
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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    1. McFadden, Daniel, 1989. "A Method of Simulated Moments for Estimation of Discrete Response Models without Numerical Integration," Econometrica, Econometric Society, vol. 57(5), pages 995-1026, September.
    2. Jeffrey R. Brown & Austan Goolsbee, 2000. "Does the Internet Make Markets More Competitive?," NBER Working Papers 7996, National Bureau of Economic Research, Inc.
    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 609-32, November.
    4. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
    5. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
    6. Stahl, Dale O., 1996. "Oligopolistic pricing with heterogeneous consumer search," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 243-268.
    7. 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.
    8. Rob, Rafael, 1985. "Equilibrium Price Distributions," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 487-504, July.
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