Uncertainty and Experimentation in Pharmaceutical Demand: Anti-Ulcer Drugs

Due to differences in the effectiveness and side effects of different drugs, uncertainty is an important component of prescription drug choice. This uncertainty can cause patients and doctors to experiment with different drugs until they find a good match. In this paper, we specify and estimate a dynamic model of pharmaceutical choice under uncertainty in which patients choose a drug in order to minimize the present discounted value of costs associated with treatment in the anti-ulcer drug market. We find strong evidence that this market is split into casual patients for whom uncertainty about drug quality doesn't matter, and serious patients for whom quality differentials between drugs matter, since a high quality drug can substantially lower the expected treatment length (and therefore the associated expected treatment costs). We consider the implications of these results for innovation in this drug market.