Job Market Paper:
Switching Costs, Quality Misconceptions and Behavioral Pricing in the Pharmaceutical Market (Download)
[Unicredit & Universities Best Job Market Paper Award, November 2018]
This article examines the market power of branded prescription drugs faced with generic competition. Using prescription-level and matched socioeconomic panel data of the entire Swedish population between 2010 and 2016, I provide evidence for the key role of switching costs. A discontinuity surrounding patent expirations establishes that the effect is causal. Further, by comparing medical experts to non-experts, I show that non-experts experience considerable quality misconceptions. A unique feature of the Swedish market allows me to rule out patients’ inattention due to information costs as a source of market power. Therefore, switching costs and quality misconceptions are the key determinants of market power. I then estimate a dynamic oligopoly model with forward-looking firms which is used in counterfactual studies of the effect of switching costs and quality misconceptions on prices. First, an increase in the length of procurement mimics a reduction of switching costs. In this scenario prices increase by 6.6%. While the effect of switching costs on prices in theory is ambiguous, moderate switching costs and sufficient competition for new patients increase competitive pressure. Second, if everyone acts as a medical expert and experiences fewer misconceptions, prices would fall by 11.9%.
Price Dynamics of Swedish Pharmaceuticals (Download)
[Rising Star Session, EARIE 2018]
[Best Paper Award, RGS Doctoral Conference in Economics 2018]
This paper investigates price patterns of off-patent pharmaceuticals in Sweden. I show that price dynamics are dependent on the number of competitors. For example, manufacturers who are the only supplier of a substance do not vary their prices. In oligopolies with two or three suppliers, firms occasionally rotate their prices in a symmetrical fashion. In markets with more than three suppliers, the cheapest firm often increases its price in the next month. The price patterns follow predictions from a model of dynamic price competition, where the demand for pharmaceuticals incorporates the known biases of consumers: habit persistence and brand preferences.
Work in Progress:
Do District Elected Members of the Parliament favor their District or their Party? A Textual Analysis of Parliamentary Speeches using Machine Learning.
(Together with Andreas Born)
Members of the German parliament can be elected over their party’s list or a district. This paper uses a discontinuity to quantify the causal effect of a district-election on the conformity to the party line in parliamentary speeches and voting. We observe strong adherence to party voting and a district-election does not affect a roll-call voting causally. We use textual analysis to analyze parliamentary speeches. Speeches of district-elected members of parliament do not differ, in terms of cosines-distance, from those of their party-peers who have been elected through closed party lists. To build a measure of closeness of a speech to a party, we train a classifier on the party manifestos to predict the probability that a parliamentary speech belongs to a certain party. The predicted likelihoods provide us with a measure of closeness of the MPs’ speeches to their own party’s manifesto. At the discontinuity, district elected candidates do not use a wording closer or further away from the party’s manifesto. In conclusion, a district election does not influence an MP’s adherence to the party line causally.
Obfuscation and Rational Inattention
(Together with Johannes Kasinger)