Competition and Advertising in Specialized Markets: A Study of the U.S. Pharmaceutical Industry
AbstractThis 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 InfoPaper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 624.
Length: 33 pages
Date of creation: 29 Sep 2005
Date of revision: 10 Nov 2005
Note: previously circulated as "Why Count Advertising Rivals? Competition and Consumer Advertising in Specialized Markets"
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Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Web page: http://fmwww.bc.edu/EC/
More information through EDIRC
Advertising; Competition; Pharmaceutical; Expert; Nash equilibrium;
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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-04 (All new papers)
- NEP-BEC-2005-10-04 (Business Economics)
- NEP-COM-2005-10-04 (Industrial Competition)
- NEP-MKT-2005-10-04 (Marketing)
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.:
- 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.
- Calfee, John E. & Stempski, Randolph & Winston, Clifford, 2003. "Direct-to-Consumer Advertising and the Demand for Cholesterol-Reducing Drugs," Working paper 425, Regulation2point0.
- Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
- Luís M. B. Cabral, 2000. "Introduction to Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032864, January.
- 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.
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