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Direct to Consumer Advertising in Pharmaceutical Markets

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Author Info
Kurt R. Brekke ()
Michael Kuhn ()

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Abstract

We study effects of direct-to-consumer advertising (DTCA) in the prescription drug market. There are two pharmaceutical firms providing horizontally differentiated (branded) drugs. Patients differ in their susceptibility to the drugs. If DTCA is allowed, this can be employed to induce (additional) patient visits. Physicians perfectly observe the patients' type (of illness), but rely on information to prescribe the correct drug. Drug information is conveyed by marketing (detailing), creating a captive and a selective segment of physicians. First, we show that detailing, DTCA and price (if not regulated) are complementary strategies for the firms. Thus, allowing DTCA induces more detailing and higher prices. Second, firms benefit from DTCA if detailing competition is not too fierce, which is true if investing in detailing is sufficiently costly. Otherwise, firms are better off with a ban on DTCA. Finally, DTCA tends to lower welfare if insurance is generous (low copayments) and/or price regulation is lenient. The desirability of DTCA also depends on whether or not the regulator is concerned with firms' profit.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 1493.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1493

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Related research
Keywords: marketing; pharmaceuticals; oligopoly;

Other versions of this item:

Find related papers by JEL classification:
I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
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

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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.:
  1. Antonio Cabrales, 2003. "Pharmaceutical Generics, Vertical Product Differentiation, and Public Policy," Working Papers, Research Center on Health and Economics 662, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  2. Judith K. Hellerstein, 1998. "The Importance of the Physician in the Generic Versus Trade-Name Prescription Decision," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 108-136, Spring. [Downloadable!] (restricted)
  3. Lundin, Douglas, 2000. "Moral hazard in physician prescription behavior," Journal of Health Economics, Elsevier, vol. 19(5), pages 639-662, September. [Downloadable!] (restricted)
  4. Eckard, E Woodrow, Jr, 1991. "Competition and the Cigarette TV Advertising Ban," Economic Inquiry, Oxford University Press, vol. 29(1), pages 119-33, January.
  5. Toshiaki Iizuka, 2004. "What Explains the Use of Direct-to-Consumer Advertising of Prescription Drugs?," Journal of Industrial Economics, Blackwell Publishing, vol. 52(3), pages 349-379, 09. [Downloadable!] (restricted)
  6. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Blackwell Publishing, vol. 51(1), pages 63-81, January. [Downloadable!] (restricted)
  7. Pierre Azoulay, 2002. "Do Pharmaceutical Sales Respond to Scientific Evidence?," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 11(4), pages 551-594, December. [Downloadable!] (restricted)
  8. Toshiaki Iizuka & Ginger Zhe Jin, 2005. "The Effect of Prescription Drug Advertising on Doctor Visits," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 14(3), pages 701-727, 09. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
  10. Scherer, F.M., 2000. "The pharmaceutical industry," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 25, pages 1297-1336 Elsevier. [Downloadable!] (restricted)
  11. Paul H. Rubin & Joel L. Schrag, 1999. "Mitigating Agency Problems by Advertising, with Special Reference to Managed Health Care," Southern Economic Journal, Southern Economic Association, vol. 66(1), pages 39-60, July.
  12. Rizzo, John A, 1999. "Advertising and Competition in the Ethical Pharmaceutical Industry: The Case of Antihypertensive Drugs," Journal of Law & Economics, University of Chicago Press, vol. 42(1), pages 89-116, April.
  13. Stergios Skaperdas, 1996. "Contest success functions (*)," Economic Theory, Springer, vol. 7(2), pages 283-290.
    Other versions:
  14. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 465-91, October. [Downloadable!] (restricted)
  15. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Brekke, Kurt Richard & Cellini, Roberto & Siciliani, Luigi & Straume, Odd Rune, 2008. "Competition and Quality in Regulated Markets: a Differential-Game Approach," CEPR Discussion Papers 6801, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Kurt R. Brekke & Odd Rune Straume, 2008. "Pharmaceutical Patents: Incentives for R&D or Marketing?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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