Competition and Advertising in Specialized Markets: A Study of the U.S. Pharmaceutical Industry

Amrita Bhattacharyya ()
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Amrita Bhattacharyya: Boston College, Postal: Dept. of Economics, Boston College, Chestnut Hill, MA 02467 USA

No 624, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: This paper analyzes advertising incentives and strategies in specialized markets, where consumers' decisions are dictated by experts. By analyzing the market stealing and market expanding aspects of advertising, this study shows that in a sub-game perfect equilibrium only some (and not all) firms may choose to advertise to consumers. From the welfare perspective, consumer advertising is socially optimal when advertising has only market expanding effects. Furthermore, a simple game-theoretic model shows that when only some firms advertise to consumers, the crucial determinant of advertising is the number of advertisers. In particular, with increased competition from rival advertisers, each firm's advertising decreases. Modeling specific features of the U.S. prescription drugs market the theoretical analysis suggests that the wide variation in direct-to-consumer-advertising (DTCA) by U.S. pharmaceutical companies both within and across drug classes is due to differences in disease-familiarity and heterogeneity in patients' types. Using annual, brand-level DTCA expenditure data for prescription drugs, empirical results give evidence of the negative impact of competition on advertising.

Keywords: Advertising; Competition; Pharmaceutical; Expert; Nash equilibrium (search for similar items in EconPapers)
JEL-codes: I0 L0 M3 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2005-09-29, Revised 2005-11-10
New Economics Papers: this item is included in nep-bec, nep-com and nep-mkt
Note: previously circulated as "Why Count Advertising Rivals? Competition and Consumer Advertising in Specialized Markets"
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Citations: View citations in EconPapers (1)

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