University of Copenhagen: Economist wants to end the alphabet’s power over pharmaceuticals

You’re at the pharmacy with a prescription in hand. You hand it over the counter and the pharmacist says:

“I have a similar product that is cheaper. Would you like that instead?”

Perhaps you are a thrifty person who agrees to the proposal – but in fact around 30% of Danes say no to the pharmacist’s well-intentended proposal.

“Many consumers insist on following the doctor’s “choice” of product. It may feel wrong to want to save money when a doctor has chosen a product for you. Or you may be confused by the price difference and uneasy about the situation. You know that cheaper often means worse,” explains Anders Munk-Nielsen, associate professor at the Department of Economics.

He has scrutinized data from the Danish pharmaceutical market and has discovered a clear trend: the product that the doctor prescribes gets an unfair advantage compared to competitors – even when the products have exactly the same effect.

The A’s raise their price
How does the doctor choose between nearly identical products, you might ask.

“When your doctor writes a prescription, she has to choose a product from a list. There can be up to ten products with the same active ingredient, but they are produced by different companies,” explains Anders Munk-Nielsen and continues:

“Often the doctor has no reason to prefer one product over another. So it is natural to just choose the first. And since the list is sorted alphabetically by company name, the choice often falls on a company that starts with A.”

After examining the data, Anders Munk-Nielsen found that both prices, market shares, turnover and the number of prescriptions fall in alphabetical order.

“Even among products with the active ingredient, products from companies starting with A tend to cost more than ones where the company name starts with Z. Company A uses the advantage from the alphabetical sorting on the doctor’s screen to set a higher price,” says Anders Munk-Nielsen.

This means that the doctor’s innocent choice of company A suddenly has consequences for the consumer, who ends up wasting money.

The Competition Authority is on the case
Fortunately, the problem is easy to solve, Anders Munk-Nielsen points out:

“The doctor should be able to write the molecule and not the company name on the prescription. Then the cheapest product becomes the starting point when you’re at the pharmacy, and the competition will be intensified – to the benefit of the customer,” he says.

Anders Munk-Nielsen’s study of the pharmaceutical market has been noticed by the Danish Competition and Consumer Authority. The authority therefore now proposes a system of so-called generic prescription, so that the molecule the patient needs will be on the prescription instead of the company’s name.

Conference on competition and regulation
On 9 November, Anders Munk-Nielsen will participate in a conference on well-functioning markets, competition and regulation. The Danish Competition and Consumer Authority is hosting the conference, where the pharmaceutical sector is the subject of the first debate. Read more about the event here (in Danish)
“In fact, almost everyone agrees that it is an improvement. No company should have an advantage simply because of its name,” emphasizes Anders Munk-Nielsen.

However, he does not only see the trend in the pharmaceutical market – alphabetical sorting distorts competition in many settings.

“In the old days, you changed your name to reach the initial pages of the phone book. On Google, you pay to appear at the top of the list of search results. Across these settings, most people can’t bear to read through the whole list,” he says.

Top candidate placed at the bottom of the list
Anders Munk-Nielsen finds other examples of distortions caused by alphabetical sorting in pension savings and mandatory insurance.

“Here, the consumer often gets a ‘clever’ default choice as a way to mitigate complexity. Researchers have long been aware of how strongly default options affect consumer choices. My research is looks at how the default company can use its position to raise its price,’ he explains.

In the Danish general election that just ended, another example of the influence of the alphabet was seen: In Nyborg, the candidates of the Social Democrats were mistakenly ranked alphabetically on the ballot, which put the leading candidate at the bottom of the list.

“Ballots are yet another example where alphabetical ranking shouldn’t matter, but does in practice,” states Anders Munk-Nielsen.