Discounts Shift the Demand Curve: Evidence from Life-Saving Medications

Abstract

Patients are often uncertain about the cost of a medication until they arrive at the pharmacy to pick it up. The ultimate out-of-pocket cost for patients is sometimes reduced by copay cards: manufacturer-issued coupons sent to pharmacies, physicians, or patients. Using a data set containing transactions from ~85% of US pharmacies, we find that copay cards increase pick-up rates of prescribed medications even when the ultimate out-of-pocket price remains the same. In other words, copay card discounts not only increase consumption by lowering price, they shift the entire demand curve by introducing transaction utility to the purchase decision, thereby increasing demand at every price level.

Keywords: transaction utility, demand curve shift, consumer behavior, pharmaceuticals

JEL Classification: D01, D91, I12