POPULATION CHARACTERISTICS AND PRICE DISPERSION IN THE MARKET FOR PRESCRIPTION DRUGS

We examine the relationship between population characteristics and price dispersion for 75 prescription drugs in five markets. Based on models of price dispersion, we consider that search costs are likely lower for the elderly, who are repeat purchasers. Expected benefits from search are likely higher for low-income households, who lack insurance. Our results are consistent with the hypothesis that for communities with a large percentage of elderly and poor population, search effort is greater for pharmaceutical drugs, causing lower price dispersion. By understanding the characteristics of who searches for low drug prices, we begin to identify the motives of consumers that might also lead to search for the lowest cost healthcare provider or lowest cost insurance. The results suggest that the Medicare legislation that attempts to close the pharmaceutical doughnut hole may reduce search by the elderly, increase price dispersion, and potentially increase the average price of prescription drugs. (JEL D12, D83, I1, I18)