Advertising, Free-Riding, and Price Differences in the Market for Prescription Drugs
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Ismo Erkki Linnosmaa
Abstract
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.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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Articles in the same Issue
- Advances Article
- How Did SCHIP Affect the Insurance Coverage of Immigrant Children?
- The Shape of Demand: What Does It Tell Us about Direct-to-Consumer Marketing of Antidepressants?
- Stemming the Tide? The Effect of Expanding Medicaid Eligibility On Health Insurance Coverage
- Health Care Economics and Policy: An Introduction
- Contributions Article
- Sequential Patterns of Drug Use Initiation - Can We Believe In the Gateway Theory?
- The Effect of the Consolidated Omnibus Reconciliation Act of 1985 on Health Care Utilization of Employment Separators
- Did 'Targets and Terror' Reduce Waiting Times in England for Hospital Care?
- Mitigating the Problem of Unmeasured Outcomes in Quality Reports
- Advertising, Free-Riding, and Price Differences in the Market for Prescription Drugs
- Patient Welfare under the Legal Standard of Care
