Payments, Promotion, and the Purple Pill

32 Pages Posted: 20 Nov 2013

See all articles by David B. Ridley

David B. Ridley

Duke University - Fuqua School of Business

Date Written: March 5, 2013


Understanding competition in the U.S. drug market requires knowing how sensitive demand is to prices. The relevant prices for insured consumers are copayments. There are many studies of copayment elasticity in the health literature, but they are of limited applicability for studies of competition. Due to a paucity of data, such studies typically control for neither competitor copayment nor advertising. Whereas previous studies examined copayment sensitivity when copayments for branded drugs move in unison, this study examines copayment sensitivity when copayments diverge. This study uses unique panel data of insurance copayments and utilization for 77 insurance groups, as well as data on advertising. The results indicate that demand can be much more sensitive to copayment than previously recognized. Manufacturers selling drugs with higher copayments than branded competitors can lose substantial market share. Manufacturers can offset the loss of demand by increasing advertising to physicians, but it is costly.

Keywords: pharmaceutical, drug, elasticity, price, copayment, advertising

JEL Classification: I10, L65

Suggested Citation

Ridley, David B., Payments, Promotion, and the Purple Pill (March 5, 2013). Available at SSRN: or

David B. Ridley (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

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