Heterogeneous Demand Elasticities Sample Clauses

Heterogeneous Demand Elasticities. One might wonder if heterogeneous demand elasticities could also threaten the approach here. Our theory predicts that consumers exhibit less elastic demand for insured drugs, due to the presence of insurance. However, consumers may have systematically lower demand elasticities for insured drugs due to differences in their underlying preferences for those drugs, rather than insurance status per se11. From a theoretical point of view, however, heterogeneous demand elasticities do not compromise estimates of elasticities on the margin and cannot easily account for the results we observe. For instance, suppose that consumers exhibit systematically less elastic demand for insured drugs, due to differences in underlying preferences for such drugs. On the margin, standard theory 11 As discussed earlier, the two primary drivers of insurance status are the proportion of elderly users, and hospital-administration of the drug. There is no empirical evidence that documents differences in demand elasticities for drugs either based on proportion of elderly users or site of administration. predicts that the aggregate market elasticity is purely a function of the monopoly markup, and should be less than -1. This is inconsistent with the elasticity values we observe for highly insured molecules. The same result holds if insured consumers have systematically lower demand elasticities than uninsured consumers. In this case, demand elasticity at a given point would be lower for insured drugs, due to the presence of more insured consumers. However, on the margin and in equilibrium, aggregate elasticity will continue to depend on the markup, and to be less than -1.