Time: 12:15 pm – 1:30 pm
Date: February 5 , 2019
Place: Room 3001
Aljoscha JANSSEN (Stockholm School of Economics) – “Switching Costs, Quality Misconceptions and Behavioral Pricing in the Pharmaceutical Market” Polytechnique Recruitment
Abstract:
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%.