Description:

Anastasiia Evdokimova (Northwestern University): Obfuscation on the OTC market: suboptimal choices and costly information acquisition

Abstract: The goal of the FDA on the self-medication market is to guide consumers to the appropriate treatment choice: to provide clear, simple, and readable over-the-counter drug labels. While these policies manage to reach symptom/drug matching, according to our analysis, we cannot rule out the existence of consumer obfuscation. We observe a price dispersion for identical drugs, which differ only in the direction of usage. We also document that under this price dispersion, consumers make suboptimal decisions, choosing the more expensive version of the identical drug. One possible explanation for why consumers make suboptimal decisions under the full information case is that while information from labels is publicly available, some parts are costly to acquire. While the front label of the drug contains all the information that can lead to the first best decision, part of this information, such as active components, is health-related, specific, knowledge that is hard to obtain and use during decision-making. Therefore, we construct a model that helps to disentangle costly information acquisition decisions from preferences and inertia and draw a distribution of the information acquisition costs. Based on the parameters of this model, we will be able to construct policy counterfactuals that address changes in welfare as a result of a change in the price of information acquisition.