Executive Summary
The impact of direct-to-consumer (DTC) advertising of prescription drugs on consumers has generated considerable debate. Given rising health care costs, the question whether DTC advertising and other forms of promotion increase the price of prescription drugs is particularly important. This study uses data on name brand drugs in five major therapy classes marketed in the United States during 2001–2005 to test the effect of DTC advertising and other promotional variables on the price elasticity of demand.
The data indicate that, in general, there is not a significant relationship between DTC advertising and price elasticity in these five categories. Given the inverse relationship between elasticity of demand and price, the findings do not support the position that consumers pay higher prices as a result of DTC advertising in the pharmaceutical industry. Therefore, our findings support the notion that DTC advertising neither raises nor lowers prices; thus, our study suggests that DTC advertising is not a contributor to increasing health care costs in the United States. Consequently, this finding, combined with the best evidence from prior studies suggests that restricting or banning DTC advertising would not lead to any significant decline in health care costs. Thus, the passage of legislation to ban DTC advertising based on the notion that such advertising raises prices would not be successful in terms of meeting this goal. Furthermore, an unintended consequence may be that awareness and treatment of some diseases, such as depression and cholesterol, might actually decline, and consequently, the net effect on patient welfare would be negative. If fewer people use these drugs, it would not necessarily be in the public’s interest.
The results suggest that pharmaceutical promotion does not appear to decrease price elasticity and thus does not lead to increases in prices. Subsequently, the price elasticity of demand in the pharmaceutical drug markets examined is not dependent on promotional activities of the firm. As a result, with the possible exception of detailing, there is not any convincing evidence that pharmaceutical promotion increases the price of prescription drugs. Although there is evidence that product sampling may contribute to decreased price elasticity in some therapy classes, the raw size of this impact appears to be small, as shown by the effect sizes provided. However, this result may be skewed because the product sampling expenditures are reported as being made at the average retail price paid by consumers and thus overstate the true cost to manufacturers.
For managers of pharmaceutical companies, the results suggest that, at least in categories in which several differentiated products that fulfill the same medical need are on the market, heavy DTC advertising is not likely to be effective in allowing the company to increase prices. For example, in the erectile dysfunction and cholesterol products categories, the data suggest that increasing the price to substantially above that of competitors is likely to lead some consumers to defect to competing brands.
Biography
Michael L. Capella is Assistant Professor of Marketing in the Villanova School of Business at Villanova University. Professor Capella’s research interests focus on the area of marketing and public policy issues, including topics related to advertising effects, consumer consumption of harmful products, and pharmaceutical marketing practices. Before receiving his PhD in Marketing, Professor Capella spent eight years in professional sales management with a bakery ingredients manufacturer. His industry experience included account management and relationship marketing with large retail grocery chains, wholesale accounts, and channel intermediaries. Professor Capella has publications in leading journal outlets, including Journal of Public Policy & Marketing, Journal of Retailing, and Journal of Advertising, and he was recently awarded the best-article award in the Journal of Advertising for 2008. He has also presented at various professional conferences and published his work in the conference proceedings. For example, he received the 2006 Marketing and Public Policy Conference Best Conference Paper award.
Charles R. Taylor is Professor of Marketing in the Villanova School of Business at Villanova University and is Senior Research Fellow for the Villanova University Center for Marketing and Public Policy Research. Professor Taylor holds the John A. Murphy Endowed Chair in Marketing. He received his PhD from Michigan State University. His primary research interests include the area of marketing and public policy, including advertising regulation, signage regulation, and global issues (e.g., country-of-origin claims). Professor Taylor served as president of the American Academy of Advertising in 2005. He has published numerous articles in leading academic journals and serves on several editorial review boards. In addition, he currently serves as editor of International Journal of Advertising. Professor Taylor was recently listed as one of the leading contributors to Journal of Public Policy & Marketing and has served as an expert witness in several court cases involving marketing and public policy issues.
Randall C. Campbell is Associate Professor of Economics in the College of Business and Industry at Mississippi State University. He received his PhD in Economics from Louisiana State University and has an undergraduate degree in Industrial Management from Purdue University. Randall’s research interests include applied econometrics, maximum entropy estimation, and limited dependent variable models. His teaching interests include econometrics, statistics, and microeconomics. He currently serves on the editorial board of International Economics and Finance Journal.
Lance S. Longwell is the director of public relations at Siemens Medical Solutions USA. Before joining Siemens, Lance was the public relations manager at IMS Health and has extensive experience in the pharmaceutical industry. Lance received his MBA from Villanova University.
Journal of Public Policy & Marketing, Volume 28, Number 2, Fall 2009
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