Mergers and advertising in the pharmaceutical industry

Pierre Dubois and Gosia Majewska
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Pierre Dubois: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Gosia Majewska: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: In many industries, the market structure determines the level of both price competition and promotional activities. We study how price and advertising strategies change when firms merge in pharmaceutical markets in the US. We show that across all drug markets, although mergers do indeed increase prices, advertising spending decreases after a merger. Merger simulations that do not account for advertising reductions may thus lead to biased price effects. Considering a merger of two large pharmaceutical companies in an antimicrobial drug market, we estimate a structural model of supply and demand and simulate the merger effect under different magnitudes of advertising changes. We find that the merger effect on prices is lower when accounting for advertising decreases than when ignoring them. We also provide welfare evaluations either using static consumer surplus or accounting for the dynamic consumer surplus effect of innovation that larger industry profit incentivizes.

Keywords: Merger; Advertising; Drugs; Welfare; Innovation (search for similar items in EconPapers)
Date: 2025-06-20
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