Ulric B. and Evelyn L. Bray Social Sciences Seminar

Abstract: Direct to consumer advertising (DTCA) of prescription pharmaceuticals can foster the use of new innovative treatments and accelerate access to better medicine for patients, especially for those who do not regularly see doctors. However, DTCA can also result in excessive use and is a competitive tool for business stealing which shifts consumer spending between drugs with no notable welfare effects. The tradeoff generated policies which differed by country and time periods. Currently DTCA is only allowed in the U.S. (since 1997 on TV) and New Zealand. This paper builds and estimates two dynamic models pharma advertising and applies them to four markets. Both models assume that firms chose advertising to maximize their value, but only one assumes that the firms perceptions of the discounted value of returns generated by the advertising are in any sense correct or equilibrium perceptions. We compare the in-sample predictions of the two models, and then use the equilibrium model to do out-of-sample (or counterfactual) evaluation of alternative advertising regulations. The empirical results illustrate the relationships between DTCA, detailing, and market structure, and show that the health and pro ts impacts of policy changes differ by market.

Joint work with Pierre Dubois from Toulouse School of Economics.