Switching Costs, Quality Misconceptions and Behavioral Pricing in the Pharmaceutical Market (Download) (Online Appendix)
[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%.
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.
In most democracies members of parliament are either elected over a party list or by a district. We use a discontinuity in the German parliamentary system to investigate the causal effect of a district-election on an MP’s conformity with her party-line. A district-election does not affect roll call voting behavior causally, possibly due to overall high adherence to party voting. Analyzing the parliamentary speeches of each MP allows us to overcome the high party discipline with regard to parliamentary voting. Using textual analysis and machine learning techniques, we create two measures of closeness of an MP’s speeches to her party. We find that district-elected members of parliament do not differ, in terms of speeches, from those of their party-peers who have been elected through closed party lists. However, both speeches and voting correlate with district characteristics suggesting that district-elections allow districts to select more similar politicians.
Work in Progress:
Obfuscation and Rational Inattention
(Together with Johannes Kasinger)
Pregnancy and Alcohol Purchases: Evidence from Scanner Data
(Together with Elle Parslow)