Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 612: Advertising as a Signaling Device in the Swedish Pharmaceuticals Market

Jörgen Hellström () and Niklas Rudholm ()
Additional contact information
Jörgen Hellström: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Niklas Rudholm: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

Abstract: The paper empirically studies whether pharmaceutical firms uses advertising as a signal for high quality drugs. A nested random effects count data hurdle model is introduced to handle the excess number of zero observations in the sample as well as nested random drug, firm and substance specific effects. The empirical study indicate that drug quality (measured as the number of side-effects) do not influence pharmaceutical firms decision to advertise or not, but do affect the number of ads in a given period. The higher quality of the drug the more ads.

Keywords: Signaling; pharmaceutical industry; advertising; product quality; nested random effects; count data

JEL-codes: L15; L21

14 pages, August 26, 2003

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