Uncertainty and Experimentation in Pharmaceutical Demand: Anti-Ulcer Drugs

Duke Economics Working Paper No. 98-11

26 Pages Posted: 17 Feb 1999  

Gregory S. Crawford

University of Zurich - Department of Economics

Matthew Shum

Johns Hopkins University - Department of Economics

Date Written: December 4, 1998

Abstract

Due to differences in the effectiveness and side effects of different drugs, uncertainty is an important component of prescription drug choice. This uncertainty can cause patients and doctors to experiment with different drugs until they find a good match. In this paper, we specify and estimate a dynamic model of pharmaceutical choice under uncertainty in which patients choose a drug in order to minimize the present discounted value of costs associated with treatment in the anti-ulcer drug market. We find strong evidence that this market is split into {\em casual} patients for whom uncertainty about drug quality doesn't matter, and {\em serious} patients for whom quality differentials between drugs matter, since a high quality drug can substantially lower the expected treatment length (and therefore the associated expected treatment costs). We consider the implications of these results for innovation in this drug market.

JEL Classification: C15, C61, I11

Suggested Citation

Crawford, Gregory S. and Shum, Matthew, Uncertainty and Experimentation in Pharmaceutical Demand: Anti-Ulcer Drugs (December 4, 1998). Duke Economics Working Paper No. 98-11. Available at SSRN: https://ssrn.com/abstract=147929 or http://dx.doi.org/10.2139/ssrn.147929

Gregory S. Crawford

University of Zurich - Department of Economics ( email )

Sch├Ânberggasse 1
Z├╝rich, CH-8001
Switzerland

HOME PAGE: http://www.econ.uzh.ch/faculty/groupcrawford.html

Matthew Shum (Contact Author)

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States
410-516-8828 (Phone)

HOME PAGE: http://www.econ.jhu.edu/people/shum/

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