Within- and across-consumer learning and structural state dependence
In this project we study causal effects of consumers’ past consumption experiences on their current choices among products. The research focuses on the choices consumers make at pharmacies among medically equivalent pharmaceuticals marketed by different firms.
This research will help us better understand consumers’ decisions. Such knowledge is necessary for firms that want to set prices and promote new products to maximize the present value of future profit. Therefore, it can also help researchers and policy makers to better understand and forecast firms’ decisions and market shares. For antitrust policymakers, knowledge about how consumers’ choice depends on their previous choices is important, since cross elasticities, which are used to evaluate the impact of mergers, can be seriously underestimated if this is ignored. Our research will also provide knowledge about why cheaper generic drugs do not get larger market shares, which could reduce the medical cost in Sweden with billions of SEK per year.
The main difficulty with studying the causal effect of consumers' past consumption experiences on their current choices is that both past and current choices are affected by the consumers preference, which we as researcher cannot observe. To avoid biased estimators it is essential to control for heterogeneity in preferences. We do this using different methods, e.g., flexible simulated maximum likelihood estimators and instrumental variable approaches. The instrumental variable approach can be used when studying structural state dependence, i.e. how a consumer's current choice is affected by his/her latest choice, since the Swedish substitution regulation produces massive variation in market shares over time.
Besides estimating how consumers current choices among medically equivalent pharmaceuticals are affected by their past choices, we also study how these decisions are affected by: i) which product the doctor has prescribed and the utility losses that arises when doctors prescribe another product than the cheapest one; and ii) if consumers than can get the cheapest product for free make different choices than other consumers that face the same price-difference but must pay at least a few Swedish crowns even if they choose the cheapest product.