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Advertising in Specialized Markets: Example from the US Pharmaceutical Industry

Author

Listed:
  • Amrita Bhattacharyya

    (Boston College)

Abstract

This paper studies the usefulness of advertising to both consumers and experts in specialized markets like the prescription drugs, travel and real-estate markets where the consumers' purchasing decisions are influenced by the experts (e.g., doctors, travel agents and real-estate agents). Inspired by the features of the prescription drugs market the study shows that direct-to-consumer-advertising (DTCA) does not substitute for advertising directed to physicians even when physician-advertising is only persuasive in nature. Furthermore, the paper analyzes possible advertising equilibriums in a two-firm setting and finds that it is possible to have a sub-game perfect, non-symmetric Nash Equilibrium in which only one firm advertises to the consumers and the other firm becomes a free-rider when, (i) the number of patients who are aware of treatment is very low, and (ii) there are very few patients who insist on a particular drug. Otherwise, for familiar diseases a non-advertising equilibrium is most likely. Finally, consumer advertising can have welfare improving implications depending on the disease types and patient characteristics.

Suggested Citation

  • Amrita Bhattacharyya, 2005. "Advertising in Specialized Markets: Example from the US Pharmaceutical Industry," Boston College Working Papers in Economics 610, Boston College Department of Economics, revised 10 Nov 2005.
    • Handle: RePEc:boc:bocoec:610
    Note: previously circulated as "Advertising in Specialized Markets: Example from the US Pharmaceutical Industry"
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    References listed on IDEAS

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    1. Stigler, George J., 2011. "Economics of Information," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 5, pages 35-49.
    2. Hurwitz, Mark A & Caves, Richard E, 1988. "Persuasion or Information? Promotion and the Shares of Brand Name and Generic Pharmaceuticals," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 299-320, October.
    3. 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, September.
    4. Nicholas Kaldor, 1950. "The Economic Aspects of Advertising," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 18(1), pages 1-27.
    5. Berndt, Ernst R, et al, 1995. "Information, Marketing, and Pricing in the U.S. Antiulcer Drug Market," American Economic Review, American Economic Association, vol. 85(2), pages 100-105, May.
    6. 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.
    7. Rosenthal Meredith B. & Berndt Ernst R. & Donohue Julie M. & Epstein Arnold M. & Frank Richard G., 2003. "Demand Effects of Recent Changes in Prescription Drug Promotion," Forum for Health Economics & Policy, De Gruyter, vol. 6(1), pages 1-28, January.
    8. Meredith B. Rosenthal & Ernst R. Berndt & Julie M. Donohue & Arnold M. Epstein & Richard G. Frank, 2003. "Demand Effects of Recent Changes in Prescription Drug Promotion," NBER Chapters, in: Frontiers in Health Policy Research, Volume 6, pages 1-26, National Bureau of Economic Research, Inc.
    9. Gerard R. Butters, 1977. "Equilibrium Distributions of Sales and Advertising Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 465-491.
    10. John E. Calfee & Clifford Winston & Randolph Stempski, 2002. "Direct-to-Consumer Advertising and the Demand for Cholesterol-Reducing Drugs," Journal of Law and Economics, University of Chicago Press, vol. 45(S2), pages 673-690.
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    Cited by:

    1. Sorisio, Enrico & Strøm, Steinar, 2006. "Innovation and market dynamics in the EPO market," Memorandum 12/2006, Oslo University, Department of Economics.
    2. Amrita Bhattacharyya, 2005. "Competition and Advertising in Specialized Markets: A Study of the U.S. Pharmaceutical Industry," Boston College Working Papers in Economics 624, Boston College Department of Economics, revised 10 Nov 2005.

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    More about this item

    Keywords

    advertising; DTCA; prescription; expert; Nash equilibrium;
    All these keywords.

    JEL classification:

    • L0 - Industrial Organization - - General
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising
    • I0 - Health, Education, and Welfare - - General

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