A BEJEAP Contributions article.

Abstract

This article studies the pricing and advertising of prescription drugs in a duopoly market. If advertising is banned, decisions of the prescribing physician are price-sensitive. The emerging market equilibrium is characterized by marginal-cost pricing and normal profits. The introduction of advertising, and physician-oriented advertising (detailing) in particular, creates market power and asymmetric pricing and advertising behavior. In an equilibrium, one firm chooses maximum detailing and the rival firm invests less in physician-oriented advertising. The asymmetric detailing strategies explain the observed price differences in the market for prescription drugs. The model also predicts free-riding in DTC advertising. According to the predictions of the model, the free-rider is the firm with a low level of physician-oriented advertising. The firm with maximum detailing invests money in DTC advertising, expanding the market for prescription drugs.

Submitted: June 19, 2007 · Accepted: May 26, 2008 · Published: July 25, 2008

Recommended Citation

Linnosmaa, Ismo Erkki (2008) "Advertising, Free-Riding, and Price Differences in the Market for Prescription Drugs," The B.E. Journal of Economic Analysis & Policy: Vol. 8 : Iss. 2 (Contributions), Article 8.
Available at: http://www.bepress.com/bejeap/vol8/iss2/art8