Scandinavian Working Papers in Economics

Working Papers,
University of Aarhus, Aarhus School of Business, Department of Economics

No 10-1: Price Sensitivity of Demand for Prescription Drugs: Exploiting a Regression Kink Design

Marianne Simonsen , Lars Skipper () and Niels Skipper
Additional contact information
Marianne Simonsen: School of Economics and Management, Postal: Aarhus University
Lars Skipper: Department of Economics, Aarhus School of Business, Postal: The Aarhus School of Business, Aarhus University, Department of Economics, Frichshuset Hermodsvej 22, 8230 Åbyhøj
Niels Skipper: School of Economics and Management, Postal: Aarhus University

Abstract: This paper investigates price sensitivity of demand for prescription drugs using drug purchase records for at 20% random sample of the Danish population. We identify price responsiveness by exploiting exogenous variation in prices caused by kinked reimbursement schemes and implement a regression kink design. Thus, within a unifying framework we uncover price sensitivity for different subpopulations and types of drugs. The results suggest low average price responsiveness with corresponding price elasticities ranging from -0.08 to -0.25, implying that demand is inelastic. Individuals with lower education and income are, however, more responsive to the price. Also, essential drugs that prevent deterioration in health and prolong life have lower associated average price sensitivity.

Keywords: Prescription drugs; price; reimbursement schemes; regression kink design

JEL-codes: I11; I18

49 pages, January 15, 2010

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