Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 05/03: Direct-to-Consumer Advertising in Pharmaceutical Markets

Kurt R. Brekke () and Michael Kuhn ()
Additional contact information
Kurt R. Brekke: Programme for Health Economics in Bergen, University of Bergen, Postal: Department of Economics, Hermann Fossgt. 6,, N-5007 Bergen, Norway
Michael Kuhn: Department of Economics and Related Studies, University of York, Postal: Heslington, York YO10 5DD, UK

Abstract: We study effects of direct-to-consumer advertising (DTCA) in a market with two pharmaceutical firms providing horizontally differentiated (branded) drugs. Patients varying in their susceptability to medication are a priori uninformed of available medication. Physicians making the prescription choice perfectly identify a patient’s most suitable drug. Firms promote drugs to physicians (detailing) to influence prescription decisions and, if allowed, to consumers (DTCA) to increase the awareness of the drug. The main findings are: Firstly, firms benefit from DTCA only if prices are regulated. On the one hand, DTCA reduces the physicians’ market power and thus detailing expenses, while, on the other, it triggers price competition as a larger share of patients are aware of the alternatives. Secondly, under price regulation DTCA is welfare improving as long as the regulated price is not too high. Under price competition, DTCA is harmful to welfare unless detailing is wasteful and the drugs are poor substitutes.

Keywords: Advertising; Pharmaceuticals; Oligopoly

JEL-codes: I11; L13; L65; M37

23 pages, March 7, 2003

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