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to control for adverse selection and estimated a price elasticity of demand of –1.01 for number of

prescriptions filled and –0.69 for total drug expenditures.17


Methodological Issues

An important methodological issue unique to estimating the price elasticity of demand for

prescription drugs is the prevalence of direct-to-consumer advertising and marketing. At least

two recent studies suggest that failure to control for marketing intensity may produce biased

estimates of price elasticity. Comparing drug sales before and after the relaxation of restrictions

on direct-to-consumer marketing in 1997, Ling et al. (2002) examined the effect of marketing

intensity and order of entry on the market share of anti-ulcer and heartburn medications. They

found direct-to-consumer marketing had a significant impact on market share, and even had a

spillover effect to other drugs by the same manufacturer. Ridley (2004) confirmed this effect.

Estimating the demand for prescription drugs as a function of copayments, drug prices, and drug

marketing expenditures, he found that copayments explained the demand for prescription drugs

more accurately than prices, and that failing to control for the effect of promotional spending

biased the copayment elasticity downward by nearly 50 percent.


A number of studies have measured consumers’ price responsiveness with respect to use of

acute care, such as inpatient hospital care (including emergency department services), physician

services, dental services, and mental health services. Collectively, they suggest that the price

elasticity of demand varies with the urgency of the care being sought, but the variation is less

17 Grootendorst et al. (1997) is the only other study we found that examined prescription drug use among the elderly population, though in Canada. The authors examined drug expenditures before and after a Canadian drug subsidy program introduced reference pricing, which limited reimbursement for non-preferred drugs. They found that expenditures for prescription drugs dropped by about half, mostly due to substitution of low-cost drugs for more costly alternatives.


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