Switching Costs, Brand Premia and Behavioral Pricing in the Pharmaceutical Market (Download) (Online Appendix)
[Unicredit & Universities Best Job Market Paper Award, November 2018]
[R&R, The Economic Journal]
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 patients with and without medical education, I show that those without medical education experience higher brand premia. 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 perceived quality differences 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 perceived quality differences on prices. First, an increase in the length of procurement mimics a reduction of switching costs and increases prices. 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 brand premia, prices decrease.
This paper investigates price patterns of off-patent pharmaceuticals in Sweden. I show that price dynamics are dependent on the number of competitors in the market. The price patterns follow predictions from a model of dynamic price competition in which the demand for pharmaceuticals incorporates the known biases of consumers: habit persistence and brand preferences. Using the regulated market of Swedish pharmaceuticals, I show that price may help in identifying possible tacit collusion by manufacturers in markets where consumers experience behavioral frictions.
Does a district-vote matter for the behavior of politicians? A textual analysis of parliamentary speeches (Download)
(Together with Andreas Born)
[R&R, European Journal of Political Economy]
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.
Pregnancy and Alcohol Purchases: Evidence from Scanner Data (SSRN)
(Together with Elle Parslow)
[Forthcoming, Health Economics]
We analyze household-level changes in alcohol consumption in response to pregnancy. Using scanner data, we identify households with a pregnant household member. Within an event study and a dynamic difference-in-differences estimation, we find that during a first pregnancy, households reduce their alcohol purchases by 35%. After pregnancy, purchases of alcohol are 31% lower than before pregnancy. We do not find any effect during the second pregnancy. We argue that lower consumption during pregnancy changes habits and reduces consumption in the long term. We exclude other explanations and comment on policy implications.
Does Precise Case Information Limit Precautionary Behavior? Evidence from COVID-19 in Singapore (SSRN)
(Together with Matthew Shapiro)
Limiting the spread of contagious diseases can involve both government-managed and voluntary efforts. Governments have a number of policy options beyond direct intervention that can shape individuals’ responses to a pandemic and its associated costs. During its first wave of COVID-19 cases, Singapore was among a few countries that attempted to adjust behavior through the public provision of detailed case information. Singapore’s Ministry of Health maintained and shared precise, daily information detailing local travel behavior and residences of COVID-19 cases. We use this transparency policy along with device-level cellphone data to quantify how local and national COVID-19 case announcements trigger differential behavioral changes. We find evidence that individuals are three times more responsive to outbreaks in granularly defined locales. Conditional on keeping infection rates at a manageable level, the results suggest economic value in this type of transparency by mitigating precautionary activity reductions.
Retail Pharmacies and Drug Diversion during the Opioid Epidemic (Download)
(Together with Xuan Zhang)
This study investigates the role of retail pharmacy ownership in the opioid epidemic in the United States by comparing independently owned pharmacies’ and chain pharmacies’ prescription opioid dispensing practices. Using data of prescription opioid orders at the pharmacy level between 2006 and 2012, we find that compared to chain pharmacies within the same ZIP code area, independent pharmacies on average dispense 40.9% more opioids and 61.7% more OxyContin. We further confirm that after being acquired by a chain, a previously independent pharmacy reduces dispensing of opioids by 31.7% and OxyContin by 43%. Using the OxyContin reformulation in 2010, which reduced the demand for diversion for illegal recreational use but not the demand for medical use, we show that half of the difference in dispensed OxyContin doses between independent and chain pharmacies can be attributed to drug diversion. In addition, we find that independent pharmacies’ OxyContin dispensing is higher in areas with greater competition. Furthermore, a larger county-level recreational demand is correlated with a larger difference between independent and chain pharmacies’ prescription opioid dispensing. We discuss two reasons that may explain why independent pharmacies are more likely to be linked to drug diversion. First, they have stronger financial incentives due to lower expected costs of misdoing. Second, they may have less information on patients’ prescription drug use history. Prescription drug monitoring programs help to reduce the information gap between independent and chain pharmacies to some extent, but monitoring of small independent pharmacies needs to be strengthened.
Obfuscation and Rational Inattention (Download)
(Together with Johannes Kasinger)
This paper studies the behavior of competing firms in a duopoly with rational inattentive consumers. Firms play a sequential game in which they decide to obfuscate their individual prices before competing on price. Probabilistic demand functions are endogenously determined by the consumers’ optimal information strategy, which depends on the firms’ obfuscation choice and the consumers’ unrestricted prior beliefs. We show that the game may result in an obfuscation equilibrium with high prices where both firms obfuscate and a transparency equilibrium with low prices and no obfuscation, providing an argument for market regulation. Lower information costs and asymmetric prior beliefs about prices reduce the probability of an obfuscation equilibrium. Using data on Sweden, we document a decrease in price complexity and corresponding prices in the market for mobile phone subscriptions in the last two decades. Our model rationalizes these changes and explains why complexity and high prices persist in some but not all digitalized markets.
Work in Progress:
Innovation Adoption and Competition: Evidence
from Upstream Oil & Gas
(Together with Michele Fioretti, Alessandro Iaria, and Clément Mazet)
Search Costs in the Mutual Fund Industry
(Together with Jurre Thiel)