Competition in the pharmaceutical industry: How do quality differences shape advertising strategies?

Maria-Angeles de Frutos, Carmine Ornaghi and Georges Siotis

Journal of Health Economics, 2013, vol. 32, issue 1, 268-285

Abstract: We present a Hotelling model of price and advertising competition between prescription drugs that differ in quality/side effects. Promotional effort results in the endogenous formation of two consumer groups: brand loyal and non-brand loyal ones. We show that advertising intensities are strategic substitutes, with the better quality drugs being the ones that are most advertised. This positive association stems from the higher rents that firms can extract from consumers whose brand loyalty is endogenously determined by promotional effort. The model's main results on advertising and pricing strategies are taken to the data. The latter consists of product level data on prices and quantities, product level advertising data, as well as the qualitative information on drug quality contained in the Orange Book compiled by the Food and Drug Administration (FDA). The empirical results provide strong support to the model's predictions.

Keywords: Product differentiation; Market segmentation; Advertising; Pharmaceutical industry (search for similar items in EconPapers)
JEL-codes: I11 L11 L13 L65 M37 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Competition in the Pharmaceutical Industry: How do Quality Differences Shape Advertising Strategies? (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jhecon:v:32:y:2013:i:1:p:268-285

DOI: 10.1016/j.jhealeco.2012.07.006

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