Competition in the pharmaceutical industry: How do quality differences shape advertising strategies?
AbstractWe present a Hotelling model of price and advertising competition between prescription drugs that differ in quality/side effects. Promotional effort results in the endogenous formation of two consumer groups: brand loyal and non-brand loyal ones. We show that advertising intensities are strategic substitutes, with the better quality drugs being the ones that are most advertised. This positive association stems from the higher rents that firms can extract from consumers whose brand loyalty is endogenously determined by promotional effort. The model's main results on advertising and pricing strategies are taken to the data. The latter consists of product level data on prices and quantities, product level advertising data, as well as the qualitative information on drug quality contained in the Orange Book compiled by the Food and Drug Administration (FDA). The empirical results provide strong support to the model's predictions.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Health Economics.
Volume (Year): 32 (2013)
Issue (Month): 1 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505560
Product differentiation; Market segmentation; Advertising; Pharmaceutical industry;
Other versions of this item:
- de Frutos, Maria-Angeles & Ornaghi, Carmine & Siotis, Georges, 2010. "Competition in the Pharmaceutical Industry: How do Quality Differences Shape Advertising Strategies?," CEPR Discussion Papers 8076, C.E.P.R. Discussion Papers.
- I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology
- M37 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Advertising
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Beatriz Domínguez & Juan José Ganuza & Gerard Llobet, 2005.
"R&D in the pharmaceutical industry: A world of small innovations,"
Economics Working Papers
936, Department of Economics and Business, Universitat Pompeu Fabra.
- Juan-José Ganuza & Gerard Llobet & Beatriz Domínguez, 2009. "R& D in the Pharmaceutical Industry: A World of Small Innovations," Management Science, INFORMS, vol. 55(4), pages 539-551, April.
- Beatriz Dominguez & Juan-José Ganuza & Gerard Llobet, 2006. "R&D In The Pharmaceutical Industry: A World Of Small Innovation," Working Papers wp2006_0601, CEMFI.
- Kurt R. Brekke & Michael Kuhn, 2005.
"Direct to Consumer Advertising in Pharmaceutical Markets,"
CESifo Working Paper Series
1493, CESifo Group Munich.
- Brekke, Kurt R. & Kuhn, Michael, 2006. "Direct to consumer advertising in pharmaceutical markets," Journal of Health Economics, Elsevier, vol. 25(1), pages 102-130, January.
- Brekke, Kurt R. & Kuhn, Michael, 2003. "Direct-to-Consumer Advertising in Pharmaceutical Markets," Working Papers in Economics 05/03, University of Bergen, Department of Economics.
- Kurt R Brekke & Michael Kuhn, . "Direct-to-Consumer Advertising in Pharmaceutical Markets," Discussion Papers 03/11, Department of Economics, University of York.
- Jeffrey M Wooldridge, 2010.
"Econometric Analysis of Cross Section and Panel Data,"
MIT Press Books,
The MIT Press,
edition 2, volume 1, number 0262232588, June.
- Jeffrey M. Wooldridge, 2001. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262232197, June.
- Vives, Xavier, 1990.
"Nash equilibrium with strategic complementarities,"
Journal of Mathematical Economics,
Elsevier, vol. 19(3), pages 305-321.
- Justin P. Johnson & David P. Myatt, 2006.
"On the Simple Economics of Advertising, Marketing, and Product Design,"
American Economic Review,
American Economic Association, vol. 96(3), pages 756-784, June.
- David P. Myatt & Justin P. Johnson, 2004. "On the Simple Economics of Advertising, Marketing, and Product Design," Economics Series Working Papers 185, University of Oxford, Department of Economics.
- Michael Baye & John Morgan, 2005.
"Brand and Price Advertising in Online Markets,"
- Baye, Michael & Morgan, John, 2004. "Brand and Price Advertising in Online Markets," Competition Policy Center, Working Paper Series qt9760k3hz, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
- Michael R. Baye & John Morgan, 2005. "Brand and Price Advertising in Online Markets," Working Papers 2005-08, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
- Christou, C. & Vettas, N., 2008. "On informative advertising and product differentiation," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 92-112, January.
- Regan, Tracy L., 2008. "Generic entry, price competition, and market segmentation in the prescription drug market," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 930-948, July.
- Klette, T.J., 1998.
"Market Power, Scale Economies and Productivity: Estimates from a Panel of Establishment Data,"
15/1998, Oslo University, Department of Economics.
- Klette, Tor Jakob, 1999. "Market Power, Scale Economies and Productivity: Estimates from a Panel of Establishment Data," Journal of Industrial Economics, Wiley Blackwell, vol. 47(4), pages 451-76, December.
- Bagwell, Kyle, 2007.
"The Economic Analysis of Advertising,"
Handbook of Industrial Organization,
- Toshiaki Iizuka & Ginger Z. Jin, 2007. "Direct To Consumer Advertising And Prescription Choice," Journal of Industrial Economics, Wiley Blackwell, vol. 55(4), pages 771-771, December.
- Pierre Azoulay, 2002. "Do Pharmaceutical Sales Respond to Scientific Evidence?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 11(4), pages 551-594, December.
- Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 63-81, January.
- Moulton, Brent R, 1990. "An Illustration of a Pitfall in Estimating the Effects of Aggregate Variables on Micro Unit," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 334-38, May.
- Ram Bala & Pradeep Bhardwaj, 2010. "Detailing vs. Direct-to-Consumer Advertising in the Prescription Pharmaceutical Industry," Management Science, INFORMS, vol. 56(1), pages 148-160, January.
- Meyerhoefer Chad D. & Zuvekas Samuel H, 2008. "The Shape of Demand: What Does It Tell Us about Direct-to-Consumer Marketing of Antidepressants?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(2), pages 1-34, January.
- Dhaval Dave & Henry Saffer, 2010. "The Impact of Direct-to-Consumer Advertising on Pharmaceutical Prices and Demand," NBER Working Papers 15969, National Bureau of Economic Research, Inc.
- Chioveanu, Ioana, 2008.
"Advertising, brand loyalty and pricing,"
Games and Economic Behavior,
Elsevier, vol. 64(1), pages 68-80, September.
- Nils-Henrik M. von der Fehr & Kristin Stevik, 1998.
"Persuasive Advertising and Product Differentiation,"
Southern Economic Journal,
Southern Economic Association, vol. 65(1), pages 113-126, July.
- Von der Fehr, N.H.M. & Stevik, K., 1996. "Persuasive Advertising and Product Differentiation," Memorandum 01/1996, Oslo University, Department of Economics.
- Scott Morton, Fiona M., 2000. "Barriers to entry, brand advertising, and generic entry in the US pharmaceutical industry," International Journal of Industrial Organization, Elsevier, vol. 18(7), pages 1085-1104, October.
- Konigbauer, Ingrid, 2007. "Advertising and generic market entry," Journal of Health Economics, Elsevier, vol. 26(2), pages 286-305, March.
- Rizzo, John A, 1999. "Advertising and Competition in the Ethical Pharmaceutical Industry: The Case of Antihypertensive Drugs," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 89-116, April.
- Z. John Lu & William S. Comanor, 1998. "Strategic Pricing Of New Pharmaceuticals," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 108-118, February.
- Toshiaki Iizuka, 2004. "What Explains the Use of Direct-to-Consumer Advertising of Prescription Drugs?," Journal of Industrial Economics, Wiley Blackwell, vol. 52(3), pages 349-379, 09.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wendy Shamier).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.