Advertising, Free-Riding, and Price Differences in the Market for Prescription Drugs
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.
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Volume (Year): 8 (2008)
Issue (Month): 2 (July)
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