The Effect of Regulated Competition on Pharmaceutical Advertising and Promotion

Guy David () and Sara Markowitz
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Guy David: University of Pennsylvania and NBER, 202 Colonial Penn Center, 3641 Locust Walk, Philadelphia, PA 19104, USA.

Eastern Economic Journal, 2015, vol. 41, issue 1, 24-39

Abstract: Pharmaceutical advertising and promotion are distinct in that the firm’s decisions are highly interconnected with issues surrounding consumer safety. Expenditure decisions must balance profitable demand expansions with potential regulatory actions, and depend on the nature of competition (monopoly versus oligopoly). We develop a model of the firm’s choice of expenditures under different competitive scenarios with consideration of possible regulatory action. We test the model’s predictions with data from the market for erectile dysfunction drugs, which is ideal for analysis as it experienced an abrupt shift in structure and faced regulatory action. We find that advertising and promotion expenditures increase sales but the magnitudes are sensitive to competition and regulation.

Date: 2015
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