Working Paper No. 1317

Switching Costs, Brand Premia and Behavioral Pricing in the Pharmaceutical Market

Published: February 12, 2020Pages: 54Keywords: Switching Costs; Brand Premia; Behavioral Pricing; PharmaceuticalsJEL-codes: D12; I11; L13

Switching Costs, Brand Premia and Behavioral Pricing in the Pharmaceutical Market Aljoscha Janssen


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.


Reference:

Jansson, Aljoscha (2020), "Switching Costs, Brand Premia and Behavioral Pricing in the Pharmaceutical Market". IFN Working Paper No. 1317. Stockholm: Research Institute of Industrial Economics.

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This book explores the complex and ever-changing relationship between the European Union and its member states. The recent surge in tension in this relationship has been prompted by the actions of some member state governments as they question fundamental EU values and principles and refuse to implement common decisions seemingly on the basis of narrowly defined national interests.

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