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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 a mar- ket with two pharmaceutical firms providing horizontally dierentiated (branded) drugs. Patients varying in their susceptability to medication are a prioriuninformed of available medication. Physicians making the prescription choice perfectly identify a patient's most suitable drug. Firms promote drugs to physicians (detailing) to influence prescription decisions and, if allowed, to consumers (DTCA) to increase the awareness of the drug. The main Þndings are: Firstly, Þrms beneÞt fromDTCAonlyif prices are regulated. On the one hand, DTCA reduces the physicians™ market power and thus detailing expenses, while, on the other, it triggers price competition as a larger share of patients are aware of the alternatives. Secondly, under price regulation DTCA is welfare improving as long as the regulated price is not too high. Under price competition, DTCA lowers welfare unless detailing is wasteful and the drugs are poor substitutes.

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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 03/11.

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Handle: RePEc:yor:yorken:03/11

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Related research
Keywords: Advertising; 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

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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. Eckard, E Woodrow, Jr, 1991. "Competition and the Cigarette TV Advertising Ban," Economic Inquiry, Oxford University Press, vol. 29(1), pages 119-33, January.
  3. 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)
  4. 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)
  5. 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)
  6. 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.
  7. 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)
  8. Lundin, Douglas, 2000. "Moral hazard in physician prescription behavior," Journal of Health Economics, Elsevier, vol. 19(5), pages 639-662, September. [Downloadable!] (restricted)
  9. 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)
  10. 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)
  11. 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)
  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.
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  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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