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This paper investigates whether aggregate consumer learning together with consumer heterogeneity in price sensitivity could explain why there is a slow diffusion of generic drugs into the market, and brand-name originators keep increasing their prices over time even after the number of generic entrants has become fixed. To examine these hypotheses, the author estimates a structural demand model that incorporates consumer learning and heterogeneity in price sensitivity. By conducting a counterfactual experiment, which eliminates the uncertainty of generics, the author finds that learning plays a role in explaining the slow diffusion.
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