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Uncertainty and learning in pharmaceutical demand


Crawford, Gregory S; Shum, Matthew (2005). Uncertainty and learning in pharmaceutical demand. Econometrica, 73(4):1137-1173.

Abstract

Exploiting a rich panel data set on anti‐ulcer drug prescriptions, we measure the effects of uncertainty and learning in the demand for pharmaceutical drugs. We estimate a dynamic matching model of demand under uncertainty in which patients learn from prescription experience about the effectiveness of alternative drugs. Unlike previous models, we allow drugs to have distinct symptomatic and curative effects, and endogenize treatment length by allowing drug choices to affect patients' underlying probability of recovery. We find that drugs' rankings along these dimensions differ, with high symptomatic effects for drugs with the highest market shares and high curative effects for drugs with the greatest medical efficacy. Our results also indicate that while there is substantial heterogeneity in drug efficacy across patients, learning enables patients and their doctors to dramatically reduce the costs of uncertainty in pharmaceutical markets.

Abstract

Exploiting a rich panel data set on anti‐ulcer drug prescriptions, we measure the effects of uncertainty and learning in the demand for pharmaceutical drugs. We estimate a dynamic matching model of demand under uncertainty in which patients learn from prescription experience about the effectiveness of alternative drugs. Unlike previous models, we allow drugs to have distinct symptomatic and curative effects, and endogenize treatment length by allowing drug choices to affect patients' underlying probability of recovery. We find that drugs' rankings along these dimensions differ, with high symptomatic effects for drugs with the highest market shares and high curative effects for drugs with the greatest medical efficacy. Our results also indicate that while there is substantial heterogeneity in drug efficacy across patients, learning enables patients and their doctors to dramatically reduce the costs of uncertainty in pharmaceutical markets.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Economics and Econometrics
Uncontrolled Keywords:Economics and Econometrics, uncertainty, learning, pharmaceutical demand, matching, dynamic discrete choice
Language:English
Date:July 2005
Deposited On:13 Sep 2019 11:07
Last Modified:31 Jul 2020 03:39
Publisher:Wiley-Blackwell Publishing, Inc.
ISSN:0012-9682
OA Status:Green
Publisher DOI:https://doi.org/10.1111/j.1468-0262.2005.00612.x

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