This paper analyzes advertising incentives and strategies in specialized markets, where consumers' decisions are dictated by experts. By analyzing the market stealing and market expanding aspects of advertising, this study shows that in a sub-game perfect equilibrium only some (and not all) firms may choose to advertise to consumers. From the welfare perspective, consumer advertising is socially optimal when advertising has only market expanding effects. Furthermore, a simple game-theoretic model shows that when only some firms advertise to consumers, the crucial determinant of advertising is the number of advertisers. In particular, with increased competition from rival advertisers, each firm's advertising decreases. Modeling specific features of the U.S. prescription drugs market the theoretical analysis suggests that the wide variation in direct-to-consumer-advertising (DTCA) by U.S. pharmaceutical companies both within and across drug classes is due to differences in disease-familiarity and heterogeneity in patients' types. Using annual, brand-level DTCA expenditure data for prescription drugs, empirical results give evidence of the negative impact of competition on advertising.
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Length: 33 pages Date of creation: 29 Sep 2005 Date of revision:
10 Nov 2005 Handle: RePEc:boc:bocoec:624
Note: previously circulated as "Why Count Advertising Rivals? Competition and Consumer Advertising in Specialized Markets" Contact details of provider: Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA Phone: 617-552-3670 Fax: +1-617-552-2308 Email: Web page: http://fmwww.bc.edu/EC/ More information through EDIRC
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Find related papers by JEL classification: L0 - Industrial Organization - - General M3 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising I0 - Health, Education, and Welfare - - General
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