History-Dependence in Drug Demand: Identification and Implications for Entry Incentives
78 Pages Posted: 28 Jan 2019 Last revised: 8 Dec 2021
Date Written: March 19, 2020
Abstract
History-dependence in drug demand can lead to higher drug prices, encourage entry deterrence, and worsen health outcomes. I use temporal discontinuities in choice sets to identify history-dependence, and find large and long-term effects. Quasi-randomly assigning a patient to a newly launched drug today produces a 54 percentage point increase in the probability of the patient choosing the same drug four years later. History-dependence is stronger in patients who take medications for multiple conditions and weaker in drugs that are significantly more effective than substitutes. It is also weaker in generics and line extensions, driven by switching from the reference branded drug. I capture these patterns by estimating a pair-specific switching-cost model of demand. Finally, I use the model to highlight the entry incentive created by demand and provide suggestive evidence that firms respond to these incentives when making entry-timing decisions.
Keywords: Prescription Drug Demand, Inertia, History-Dependence, Generic Drugs, Line Extensions, Firm Strategy, Entry Timing
JEL Classification: L65, L11, L21, L41, I12
Suggested Citation: Suggested Citation