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

Adrienne Ohler ()
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Adrienne Ohler: Department of Economics, Illinois State University

No 20110701, Working Paper Series from Illinois State University, Department of Economics

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.

Keywords: search cost; price dispersion; prescription drugs (search for similar items in EconPapers)
JEL-codes: D12 D83 I1 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2011-07
New Economics Papers: this item is included in nep-com, nep-hea, nep-hme and nep-ind
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