In the context of rising health care costs, especially for prescription drugs, it is crucial to understand the price elasticity of these drugs. Indeed, given that one has to think about how to optimally design prescription drug coverage so that insureds have the right incentives. Indeed, the current regime of lump-sum co-pay (or zero cost) prevalent in so many systems quite obviously leads to overconsumption and excessive market power for drug companies.
Marianne Simonsen, Lars and Niels Skipper exploit extensive (20% of the population!) Danish data on drug use as well as the heterogeneity in the kinked price schedule Danes face to estimate the price elasticity for various consumers and drug categories. The general conclusions, demand is price inelastic, with elasticities ranging from -0.08 to -0.25. It should be no surprise that lower incomes are more price sensitive or that more useful drugs are less (life prolonging, preventing health deterioration), but I find it somewhat puzzling that less educated people are more price sensitive, given that income is already controlled for. Same for the lower price elasticity for the elderly. The authors conjecture that the latter has to do with lower life expectancy making investment in health less worthwhile. I am not completely convinced, as health issues are much more concrete for the elderly than for the young.