We study actual and potential competition and other factors that determine price paths of brand-name drugs in the Swedish pharmaceuticals market. The results indicate that the price of the incumbent product is lowered by potential competition, entry of (additional) generics, and the introduction of a so-called reference-price system. We also identify a 'ratchet' effect, through which price regulation makes entry-deterring limit-pricing credible.
This article shows how state dependence effects can be estimated for many markets and with few assumptions by using data on how the shares of consumers buying specific products differ between those who bought the same product on their latest purchase occasion and those who did not. Using information regarding which product was cheapest when consumers made their last purchases as instrument, I estimate that state dependence increases the probability that consumers will buy the product they bought the last time by eight percentage points. This effect is larger for women and the elderly than for men and younger consumers.