understand consumer responses to changes in price or income, and occasionally it offers
estimates that conflict. Even when estimating the same population’s responsiveness to a change
in the price of the same product, two studies may offer incomparable estimates of elasticity for a
number of reasons:
The Calculation. In general, all elasticity estimates are expressed as the ratio of a
change in the quantity demanded and a change in price researchers have used different formulas to calculate both denominator. Any of four presentations of elasticity—point
or income. However, the numerator and the elasticity, arc elasticity,
semi elasticity, advantages and same change in
or take-up elasticity—are common in the literature. Each has limitations, and each generates different values of elasticity for the
how it can be
into a point
used in modeling. elasticity equation
(For example, an arc elasticity cannot be
estimate arc elasticities as a convention, we presume that reported elasticity reflect the calculation of an arc elasticity, unless it is otherwise noted.
The Definition of Demand. Even when estimating demand for seemingly the same product, researchers may use different definitions of demand. For example, the demand for health care services may be defined as the dollar amount of expenditure, the units of services used, or the probability of using any service. The data that are available for the study often determine how demand is defined.
The Measure of Price. Price also may be measured differently. With respect to the demand for insured health care services, differences in measures of price generally reflect the complex cost sharing in health insurance products. Different estimates of elasticity may reflect different measures of price—such as total premium versus employees’ share of premium, or total out-of-pocket cost versus the copayment
The Magnitude of the Price Change.
Even with the same measure of price,
consumers may respond differently to price changes of different magnitudes. A marginal change in price may motivate very little demand response, whereas a large price change may motivate a very different response. Constrained by available data or the experiment or intervention itself, an elasticity estimate derived from analysis of a small price change may be inappropriate to circumstances where the price change would be much larger.
The Delivery System and Market Environment. The health care delivery system and market environment are likely to influence the strength of the demand response to a change in price or differences in income. For example, demand response may be less in an HMO setting than in unmanaged fee-for-service systems, and consumers may be less responsive to price increases in markets with direct-to-consumer drug advertising.