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Advertising, Free-Riding, and Price Differences in the Market for Prescription Drugs

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  • Linnosmaa Ismo Erkki

    (University of Kuopio)

Abstract

This article studies the pricing and advertising of prescription drugs in a duopoly market. If advertising is banned, decisions of the prescribing physician are price-sensitive. The emerging market equilibrium is characterized by marginal-cost pricing and normal profits. The introduction of advertising, and physician-oriented advertising (detailing) in particular, creates market power and asymmetric pricing and advertising behavior. In an equilibrium, one firm chooses maximum detailing and the rival firm invests less in physician-oriented advertising. The asymmetric detailing strategies explain the observed price differences in the market for prescription drugs. The model also predicts free-riding in DTC advertising. According to the predictions of the model, the free-rider is the firm with a low level of physician-oriented advertising. The firm with maximum detailing invests money in DTC advertising, expanding the market for prescription drugs.

Suggested Citation

  • Linnosmaa Ismo Erkki, 2008. "Advertising, Free-Riding, and Price Differences in the Market for Prescription Drugs," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(2), pages 1-37, July.
    • Handle: RePEc:bpj:bejeap:v:8:y:2008:i:2:n:8
    DOI: 10.2202/1935-1682.1819
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    References listed on IDEAS

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