Advertising and pharmaceutical prices

by on May 14, 2010 at 8:07 am in Economics, Medicine | Permalink

The classic Chicago School result was that advertising for eyeglasses lowered prices, due to increased competition.  It doesn't seem the same is true for pharmaceuticals, as we see from Dhaval Dave and Henry Saffer:

Expenditures on prescription drugs are one of the fastest growing components of national health care spending, rising by almost three-fold between 1995 and 2007. Coinciding with this growth in prescription drug expenditures has been a rapid rise in direct-to-consumer advertising (DTCA), made feasible by the Food and Drug Administration’s (FDA) clarification and relaxation of the rules governing broadcast advertising in 1997 and 1999. This study investigates the separate effects of broadcast and non-broadcast DTCA on price and demand, utilizing an extended time series of monthly records for all advertised and non-advertised drugs in four major therapeutic classes spanning 1994-2005, a period which enveloped the shifts in FDA guidelines and the large expansions in DTCA. Controlling for promotion aimed at physicians, results from fixed effects models suggest that broadcast DTCA positively impacts own-sales and price, with an estimated elasticity of 0.10 and 0.04 respectively. Relative to broadcast DTCA, non-broadcast DTCA has a smaller impact on sales (elasticity of 0.05) and price (elasticity of 0.02). Simulations suggest that the expansion in broadcast DTCA may be responsible for about 19 percent of the overall growth in prescription drug expenditures over the sample period, with over two-thirds of this impact being driven by an increase in demand as a result of the DTCA expansion and the remainder due to higher prices.

The paper is here (NBER gate).  Here is a simpler paper on advertising and prescription drug expenditures.  Here is a related paper on the advertising topic.  Here is another paper which generates higher prices from advertising.  Pharmaceuticals could be different from eyeglasses for a few reasons, one being weaker contestability in the market, due to patent protection, another being that consumers process information about health care differently.  This paper suggests that co-payments don't much help reduce inappropriate demands for pharmaceuticals.   

I thank Eric John Barker for the initial pointer.

Travis Ormsby May 14, 2010 at 8:21 am

I don’t find this result surprising at all. Eyeglasses from one place are almost perfect substitutes for glasses from anywhere else, there’s very little product differentiation and little else to compete on except price.

Prescription drug advertising, however, is focused on decreasing the perceived substitutability between essentially similar drugs. How much difference is there really between Crestor, Lipitor, and Zocor? By decreasing the price elasticity of prescription drugs and the pressures of price competition, we should expect these advertisements to lead to higher prices.

Ken May 14, 2010 at 9:01 am

Travis wrote>>I don’t find this result surprising at all. Eyeglasses from one place are almost perfect substitutes for glasses from anywhere else, there’s very little product differentiation and little else to compete on except price.>>

What he said! And BTW, there’s that other important distinction that’s closely related to what Travis wrote:

A doctor will hear patients say “Y’know, I have symptoms exactly like that XYZ drug ad. I think I should try XYZ.” OTOH, an opthalmologist will seldom hear a patient say “Y’know, I didn’t realize I couldn’t see right until that ABC eyeglass ad. I think I should try ABC eyeglasses.”

Bill May 14, 2010 at 9:20 am

My doctor tells me that he has many patients who come to him asking for a purple pill, or that pill that does this or that.

Hey, nobody is paying for this…it’s just the insurance company and medicare, or so the patient thinks.

Except when the patient pays for it upfront, and then the story changes. But, the doctors often don’t know how much the medicine costs either so they don’t discuss costs/benefits with the patient.

I don’t oppose drug companies advertising. But, advertisers should be required to say how much a month’s worth of pills cost.

That is valuable consumer information that would reduce consumer costs–consumers wouldn’t purchase or ask for the drug, or would comparison shop for alternatives, or listen to other drug manufacturers who would be incented to announce lower prices as well.

And then we could always try tribal medicines if that doesn’t work.

Paul McCaffree May 14, 2010 at 10:13 am

I don’t see mention of the effect on pricing when entire Nations refuse to recognize patent unless the discoveries are sold to them at cost of production. All the rest seems trivial.

DanC May 14, 2010 at 10:19 am

Is it possible that the pharmaceutical companies actually knew that some diseases were being ignored? Ads for depression might encourage depressed people to seek help. Many studies have shown that many depressed people never seek the help they need to be more productive. In addition have all the ads for erectile dysfunction made it easier for people to discuss such topics with their physician?

Simply, DTC advertising is restricted to a hand full of drugs and conditions. So the drugs that are advertised are different from other drugs. Could this study have the tail wagging the dog?

I would look at the difference in advertising effects on OTC drugs Vs prescription drugs.

Lastly we allow patents to encourage research into new drugs. But we complain when they try to market these drugs?

Mike May 14, 2010 at 3:04 pm

Is this really that hard to figure out? The eyeglass stuff was all about price advertising, which was illegal in a lot of jurisdictions. Obviously, price advertising reduces search costs, and thus increases price competition.

Advertising about prescription Rx is about a bunch of stuff, but it is not about communicating information about prices. It is all about shifting demand curves outward. At least in a simple, (very) partial equilibrium world, that will tend to increase prices (it need not work out that way, however; if the ability to advertise product attributes increases entry, the net effect could put downward pressure on branded Rx prices).

ThomasD May 15, 2010 at 10:25 am

Mike is correct, Rx advertising is about driving demand to create a larger market. One could compare the results of drug advertising in a contestable market if generic drug manufacturers actually engaged in any for of DTC advertising, as it stands today they do not. They do not because there is little, if any, market expansion to be had, and generic prices are typically substantially lower, to the point where the service component of a prescription has a greater effect on price. So for generics the manufacturer’s price considerations rarely affect consumer behavior (they do advertise heavily to the pharmacist and pharmacy buyers.)

Tim May 18, 2010 at 5:28 pm

There are actually name brands like Tylenol, Motrin, Allegra and Zyrtec that still compete with their generic counterparts and cost several times as much.

My theory is that glasses are binary. I can see or I can’t (or at least no good advertiser has convinced me that I would see fine details better with their glasses). How do I know if my Allegra is working as well as my generic fexofenadine? If I have a really good day with the Allegra I could convince myself that it works better. Or just the placebo affect could make it so. Name brands could work better by virtue of the users believing they work better. That sort of thing seems less likely with glasses where we can easily determine their value.

Has anyone done any studies on the placebo effect and vision?

eyeglass holder July 15, 2010 at 4:21 pm

Eyeglasses just aren’t comparable to prescription medications because they are influenced by current market trends whereas the latter is controlled by the powerful pharmaceutical companies.
eyeglass case

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