Consumer Learning and Heterogeneity: Dynamics of Demand for Prescription Drugs after Patent Expiration

Andrew Ching

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates whether aggregate consumer learning together with consumer heterogeneity in price sensitivity could explain why (i) there is a slow diffusion of generic drugs into the market, and (ii) brand-name originators keep increasing their prices over time even after the number of generic entrants has become fixed. To examine these hypotheses, I estimate a structural demand model that incorporates consumer learning and heterogeneity in price sensitivity. By conducting a counterfactual experiment, which eliminates the uncertainty of generics, I find that learning plays a role in explaining the slow diffusion. By simulating the model, I find that the branded pricing pattern could be explained by: (a) the diffusion rate of generics for price-sensitive patients is faster than that for price-insensitive patients, causing the proportion of price-insensitive patients faced by brand-name firms to slowly increase over time; (b) the brand-name price elasticities of demand (evaluated at the observed prices) are often less than one and increase over time, suggesting that brand-name firms may set their prices lower than what they would do if they were myopic, in order to slow down the learning process for generic qualities. But such an incentive diminishes over time as the uncertainty slowly resolves.

Keywords: Consumer Learning; Consumer Heterogeneity; Brand-name drugs; Generic Drugs; Patent Expiration; Demand Analysis (search for similar items in EconPapers)
JEL-codes: C15 D12 D83 I11 L15 L65 (search for similar items in EconPapers)
Date: 2008-02-16
New Economics Papers: this item is included in nep-mkt
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Citations: View citations in EconPapers (28)

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Related works:
Journal Article: Consumer learning and heterogeneity: Dynamics of demand for prescription drugs after patent expiration (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:7265

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