IS ADVERTISING EFFECTIVE OR NOT? EVIDENCE FROM THE PHARMACEUTICAL MARKET

Abstract

In this paper, we study the effect of direct advertising to consumers in pharmaceutical drugs. This is an empirical study. We conclude that DTCA has a greater effect on market expansion, whereas the use of contacts and detailing could lead to “business stealing.” That is, an increase in the number of contacts that a pharmaceutical company’s representative has will create an increase in the market share for that company’s drug, to the detriment of other drugs in the same therapeutic class. Our results also support the conclusions of the theoretical models and of the other empirical research that these two types of advertising have different effects on a drug’s performance on the market: Direct-to-consumer advertising serves an informative role, and the use of contacts serves a persuasive role.

Introduction

Advertising has long been a controversial subject in the economic literature: In addition to its educational role—to inform consumers about new products and their attributes—advertising is also believed to lead to an increased demand for goods and services, sometimes at the risk of inducing unnecessary expenses for consumers. There is an ongoing debate about whether the predominant role of advertising is persuasive or informative.

Of particular interest amid the advertising debate is the marketing of pharmaceutical products. The pharmaceutical market is different from other markets in that the decisionmaker (i.e., the onewho decides whether a product is needed) is not the purchaser; health care professionals recommend a drug, and patients must follow through with the purchase of the drug and the recommended course of treatment. Advertising in the pharmaceutical market is either physician oriented or direct-toconsumer, depending on the target of the ads. Physician-oriented advertising, which represents the core of pharmaceutical advertising, consists of sales visits to doctors’ offices; distribution of free samples; advertising in industry journals; and promotional spending on meetings, conferences, and other events where pharmaceutical companies promote their products. Direct-to- consumer advertising (DTCA), a newer approach by drug manufacturers, consists of ads on television, radio, or billboards; in magazines; and in other media directed toward a general audience. The pharmaceutical industry relies heavily on advertising, with marketing expenses varying between 20 and 30 percent of sales and sometimes exceeding expenditures on research and development (R&D). Although traditionally 2 physician-oriented advertising has been the most widely used form of drug advertising, during the past decade DTCA has become increasingly important.

Direct-to-consumer advertising gained a significant role in the promotional mix for pharmaceutical companies after 1997 when the Food and Drug Administration (FDA) released new, tentative guidelines for the use of TV and other media to promote drugs directly to patients. The original guidelines, imposed in 1985, required all print ads to include an in-depth “brief summary” of the risks and side effects of advertised drugs, whereas broadcast ads were required to include a “major statement” of risks. Both types of adswere required to provide adequate information so that viewers could obtain full FDA-approved prescribing facts. Based on these requirements, two types of adswere most prevalent: (a) one thatwould alert consumers to the existence of certain symptoms and suggest that they consult a physician about the treatment of those symptoms without actually mentioning the name of a drug, and (b) one that reminded consumers about the existence of a drug brand without mentioning the associated conditions. The new guidelines released in 1997 eased the requirements for print and broadcast ads by requiring only the inclusion of a concisesummaryof risks and related information, by specifying more sources for complete information (like a toll-free number or an internet web address), and by mentioning that physicians and pharmacists were able to provide more detailed information. The 1997 DTCA tentative guidelines became final in 1999.

From 1997 to 2006, pharmaceutical companies’ spending on DTCA increased almost 20 percent each year, reaching a value of over $4.8 billion in 2006. Over the same period, their spending on drug advertising through other traditional promotional channels (i.e., direct promotion to physicians) increased by only 9 percent annually. Spending on research and development also increased at a rate of 9 percent annually. Despite the fast growth in DTCA expenditures, the costs incurred by promoting drugs directly to physicians ($7.2 billion) remained the largest part of advertising expenditures in 2006.

In this paper, we focus on the effect of different formsof advertising on a drug’smarket share within its therapeutic class and on the size of themarket for that particular class. Using sales and advertising data about drugs in four therapeutic classes, we answer the question ofwhether advertising leads to market expansion (i.e., the size of the market increases altogether) or to “business stealing” between different competitors in the same therapeutic class. The remainder of the paper is organized as follows: In section 2,we provide a brief review of the related literature; in section 3, we present the data that we used in our empirical estimation. In section 4, we describe the empirical model and the identification strategy. In section 5, we discuss the model estimates and in section 6,we provide concluding comments on our research results.

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