Quantifying the Zero-Price Effect in the Field: Evidence from Swedish Prescription Drug Choices

Abstract

We use Swedish data on consumer choices of therapeutically equivalent drugs to measure the zero-price effect. The Swedish benefit scheme for prescription drugs is a tier system where each patient’s copay share is a step function of his/her qualified accumulated expenditure, and can ultimately drop to zero. The copay tier a patient faces is exogenously determined by his/her health and drug need. In any given month, a patient pays the copay share of the lowest priced drug plus the price difference between the chosen drug and the lowest priced drug in the same therapeutically equivalent exchange group. Hence, when consumers cross the threshold and enter the zero copay tier, the net price for the lowest priced drug will switch from a small positive amount to zero. This unique quasi-random environment allows us to apply the regression discontinuity design to quantify the zero-price effect. We do so for the full sample, as well as for two subsamples that should be less affected by state dependence. Based on a linear (quadratic) specification, the estimated zero-price effect reduces choice shares of non-cheapest alternatives by 12% (13%), 39% (48%), and 23% (25%) in the full sample, new diagnoses sample, and switchers sample, respectively.

Keywords: Zero-price effect; free; behavioral pricing; pharmaceuticals; prescription drugs; generic drugs

JEL Classification: D12; D90; I11; I13; M31