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The Impact of Direct-to-Consumer Advertising on Pharmaceutical Prices and Demand

Author

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  • Dhaval Dave
  • Henry Saffer

Abstract

Expenditures on prescription drugs are one of the fastest growing components of national health care spending, rising by almost three-fold between 1995 and 2007. Coinciding with this growth in prescription drug expenditures has been a rapid rise in direct-to-consumer advertising (DTCA), made feasible by the Food and Drug Administration's (FDA) clarification and relaxation of the rules governing broadcast advertising in 1997 and 1999. This study investigates the separate effects of broadcast and non-broadcast DTCA on price and demand, utilizing an extended time series of monthly records for all advertised and non-advertised drugs in four major therapeutic classes spanning 1994-2005, a period which enveloped the shifts in FDA guidelines and the large expansions in DTCA. Controlling for promotion aimed at physicians, results from fixed effects models suggest that broadcast DTCA positively impacts own-sales and price, with an estimated elasticity of 0.10 and 0.04 respectively. Relative to broadcast DTCA, non-broadcast DTCA has a smaller impact on sales (elasticity of 0.05) and price (elasticity of 0.02). Simulations suggest that the expansion in broadcast DTCA may be responsible for about 19 percent of the overall growth in prescription drug expenditures over the sample period, with over two-thirds of this impact being driven by an increase in demand as a result of the DTCA expansion and the remainder due to higher prices.

Suggested Citation

  • Dhaval Dave & Henry Saffer, 2010. "The Impact of Direct-to-Consumer Advertising on Pharmaceutical Prices and Demand," NBER Working Papers 15969, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:15969
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    Cited by:

    1. Chesnes, Matthew & Jin, Ginger Zhe, 2019. "Direct-to-consumer advertising and online search," Information Economics and Policy, Elsevier, vol. 46(C), pages 1-22.
    2. de Frutos, Maria-Angeles & Ornaghi, Carmine & Siotis, Georges, 2013. "Competition in the pharmaceutical industry: How do quality differences shape advertising strategies?," Journal of Health Economics, Elsevier, vol. 32(1), pages 268-285.
    3. Lakdawalla, Darius & Sood, Neeraj & Gu, Qian, 2013. "Pharmaceutical advertising and Medicare Part D," Journal of Health Economics, Elsevier, vol. 32(6), pages 1356-1367.
    4. Castanheira, Micael & Ornaghi, Carmine & Siotis, Georges, 2019. "The unexpected consequences of generic entry," Journal of Health Economics, Elsevier, vol. 68(C).
    5. Dhaval M. Dave, 2013. "Effects of Pharmaceutical Promotion: A Review and Assessment," NBER Working Papers 18830, National Bureau of Economic Research, Inc.
    6. Anusua Datta & Dhaval Dave, 2017. "Effects of Physician‚Äźdirected Pharmaceutical Promotion on Prescription Behaviors: Longitudinal Evidence," Health Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 450-468, April.
    7. Robert Nathenson & Michael R. Richards, 2018. "Do coverage mandates affect direct-to-consumer advertising for pharmaceuticals? Evidence from parity laws," International Journal of Health Economics and Management, Springer, vol. 18(3), pages 321-336, September.
    8. Abby Alpert & Darius Lakdawalla & Neeraj Sood, 2015. "Prescription Drug Advertising and Drug Utilization: The Role of Medicare Part D," NBER Working Papers 21714, National Bureau of Economic Research, Inc.
    9. Matthew Chesnes & Ginger Zhe Jin, 2016. "Direct-to-Consumer Advertising and Online Search," NBER Working Papers 22582, National Bureau of Economic Research, Inc.
    10. Gregory G. Lubiani & Albert A. Okunade & Weiwei Chen, 2018. "Income Elasticity Decomposition Models and Determinants of U.S. Pharmaceutical Expenditures," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 46(4), pages 389-403, December.
    11. Brian Salter & Yinhua Zhou & Saheli Datta, 2017. "Governing new global health-care markets: the case of stem cell treatments," New Political Economy, Taylor & Francis Journals, vol. 22(1), pages 76-91, January.
    12. 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.
    13. Eisenberg, Matthew D. & Avery, Rosemary J. & Cantor, Jonathan H., 2017. "Vitamin panacea: Is advertising fueling demand for products with uncertain scientific benefit?," Journal of Health Economics, Elsevier, vol. 55(C), pages 30-44.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • K0 - Law and Economics - - General
    • K2 - Law and Economics - - Regulation and Business Law

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