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Side Effects of Competition: the Role of Advertising and Promotion in Pharmaceutical Markets

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  • Guy David
  • Sara Markowitz

Abstract

The extent of pharmaceutical advertising and promotion can be characterized by a balancing act between profitable demand expansions and potentially unfavorable subsequent regulatory actions. However, this balance also depends on the nature of competition (e.g. monopoly versus oligopoly). In this paper we model the firm's behavior under different competitive scenarios and test the model's predictions using a novel combination of sales, promotion, advertising, and adverse event reports data. We focus on the market for erectile dysfunction drugs as the basis for estimation. This market is ideal for analysis as it is characterized by an abrupt shift in structure, all drugs are branded, the drugs are associated with adverse health events, and have extensive advertising and promotion. We find that advertising and promotion expenditures increase own market share but also increase the share of adverse drug reactions. Competitors' spending decreases market share, while also having an influence on adverse drug reactions.

Suggested Citation

  • Guy David & Sara Markowitz, 2011. "Side Effects of Competition: the Role of Advertising and Promotion in Pharmaceutical Markets," NBER Working Papers 17162, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:17162 Note: HC HE LE
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    References listed on IDEAS

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    1. Sridhar Narayanan & Puneet Manchanda, 2009. "Heterogeneous Learning and the Targeting of Marketing Communication for New Products," Marketing Science, INFORMS, vol. 28(3), pages 424-441, 05-06.
    2. Hurwitz, Mark A & Caves, Richard E, 1988. "Persuasion or Information? Promotion and the Shares of Brand Name and Generic Pharmaceuticals," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 299-320, October.
    3. Leffler, Keith B, 1981. "Persuasion or Information? The Economics of Prescription Drug Advertising," Journal of Law and Economics, University of Chicago Press, vol. 24(1), pages 45-74, April.
    4. Brekke, Kurt R. & Kuhn, Michael, 2006. "Direct to consumer advertising in pharmaceutical markets," Journal of Health Economics, Elsevier, vol. 25(1), pages 102-130, January.
    5. Armantier Olivier & Namoro Soiliou, 2006. "Prescription Drug Advertising and Patient Compliance: A Physician Agency Approach," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 6(1), pages 1-41, September.
    6. John E. Calfee & Clifford Winston & Randolph Stempski, 2002. "Direct-to-Consumer Advertising and the Demand for Cholesterol-Reducing Drugs," Journal of Law and Economics, University of Chicago Press, vol. 45(S2), pages 673-690.
    7. Horowitz, Ira, 1970. "A Note on Advertising and Uncertainty," Journal of Industrial Economics, Wiley Blackwell, vol. 18(2), pages 151-160, April.
    8. Andrew Ching & Masakazu Ishihara, 2010. "The effects of detailing on prescribing decisions under quality uncertainty," Quantitative Marketing and Economics (QME), Springer, vol. 8(2), pages 123-165, June.
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    12. Toshiaki Iizuka & Ginger Zhe Jin, 2005. "The Effect of Prescription Drug Advertising on Doctor Visits," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(3), pages 701-727, September.
    13. Patricia M. Danzon & Eric L. Keuffel, 2014. "Regulation of the Pharmaceutical-Biotechnology Industry," NBER Chapters,in: Economic Regulation and Its Reform: What Have We Learned?, pages 407-484 National Bureau of Economic Research, Inc.
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    JEL classification:

    • I0 - Health, Education, and Welfare - - General
    • K0 - Law and Economics - - General
    • K2 - Law and Economics - - Regulation and Business Law

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