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Competition in the Pharmaceutical Industry: How do Quality Differences Shape Advertising Strategies?

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  • de Frutos, Maria-Angeles
  • Ornaghi, Carmine
  • Siotis, Georges

Abstract

We present a Hotelling model of price and advertising competition between prescription drugs that differ in quality/side e¤ects. Advertising results in the endogenous formation of two consumer groups: brand loyal and non-brand loyal ones. We show that advertising strategies are strategic substitutes, with the better quality drugs being the ones that are most advertised. This positive association stems from the higher rents that firms can extract from consumers whose brand loyalty is endogenously determined by promotional effort. The model's principal hypotheses on advertising and pricing strategies are taken to the data. The latter consists of product level data on price and quantities, product level advertising data as well as the qualitative information on drug quality contained in the Orange Book compiled by the Food and Drug Administration (FDA). The empirical results provide strong support to the model's predictions.

Suggested Citation

  • de Frutos, Maria-Angeles & Ornaghi, Carmine & Siotis, Georges, 2010. "Competition in the Pharmaceutical Industry: How do Quality Differences Shape Advertising Strategies?," CEPR Discussion Papers 8076, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8076
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    Cited by:

    1. Castanheira, Micael & Ornaghi, Carmine & Siotis, Georges, 2019. "The unexpected consequences of generic entry," Journal of Health Economics, Elsevier, vol. 68(C).
    2. Farasat A. S. Bokhari & Franco Mariuzzo & Anna Rita Bennato, 2021. "Innovation and growth in the UK pharmaceuticals: the case of product and marketing introductions," Small Business Economics, Springer, vol. 57(1), pages 603-634, June.
    3. Castanheira, Micael & Ornaghi, Carmine & Siotis, Georges, 2019. "Market definition in the pharmaceutical industry: a case of drugs hopping antitrust markets?," CEPR Discussion Papers 14035, C.E.P.R. Discussion Papers.
    4. Castanheira, Micael & de Frutos, Maria-Angeles & Ornaghi, Carmine & Siotis, Georges, 2017. "The Unexpected Consequences of Asymmetric Competition. An Application to Big Pharma," CEPR Discussion Papers 11813, C.E.P.R. Discussion Papers.
    5. Luiz Andrade & Catherine Sermet & Sylvain Pichetti, 2016. "Entry time effects and follow-on drug competition," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 17(1), pages 45-60, January.
    6. Luiz Andrade & Catherine Sermet & Sylvain Pichetti, 2016. "Entry time effects and follow-on drug competition," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 17(1), pages 45-60, January.
    7. Katharina Elisabeth Blankart & Tom Stargardt, 2020. "The impact of drug quality ratings from health technology assessments on the adoption of new drugs by physicians in Germany," Health Economics, John Wiley & Sons, Ltd., vol. 29(S1), pages 63-82, October.

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    More about this item

    Keywords

    advertising; market segmentation; pharmaceutical industry; Product differentiation;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • 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; Plastics
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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