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Competition and Advertising in Specialized Markets: A Study of the U.S. Pharmaceutical Industry

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  • Amrita Bhattacharyya

    ()
    (Boston College)

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    Abstract

    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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    Bibliographic Info

    Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 624.

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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"
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    Keywords: Advertising; Competition; Pharmaceutical; Expert; Nash equilibrium;

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    1. 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.
    2. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
    3. Becker, Gary S & Murphy, Kevin M, 1993. "A Simple Theory of Advertising as a Good or Bad," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 941-64, November.
    4. repec:reg:wpaper:425 is not listed on IDEAS
    5. Luís M. B. Cabral, 2000. "Introduction to Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032864, December.
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