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Positive Spillovers and Free Riding in Advertising of Prescription Pharmaceuticals: The Case of Antidepressants

59 Pages Posted: 10 Aug 2014 Last revised: 13 May 2016

Bradley Shapiro

University of Chicago - Marketing Management

Date Written: May 12, 2016

Abstract

Television advertising of prescription drugs is controversial, and it remains illegal in all but two countries. Much of the opposition stems from concerns that advertising directly to consumers may inefficiently distort prescribing patterns toward the advertised product. Despite the controversy surrounding the practice, its effects are not well understood. Exploiting a discontinuity in advertising along the borders of television markets, I estimate that television advertising of prescription antidepressants exhibits significant positive spillovers on rivals' demand. I then construct and estimate a multi-stage demand model that allows advertising to be pure category expansion, pure business stealing, or some of each. Estimated parameters indicate advertising has strong market-level demand effects that tend to dominate business-stealing effects. Spillovers are both large and persistent. Using the demand estimates and a stylized supply model, I explore the consequences of the positive spillovers on firm advertising choice. Compared with a competitive benchmark in which firms optimally free ride, simulations suggest a category-wide cooperative advertising scenario would produce a significant increase in total advertising.

Keywords: Advertising, Spillovers, Pharmaceuticals, DTCA

JEL Classification: L13, M37

Suggested Citation

Shapiro, Bradley, Positive Spillovers and Free Riding in Advertising of Prescription Pharmaceuticals: The Case of Antidepressants (May 12, 2016). Available at SSRN: https://ssrn.com/abstract=2477877

Bradley Shapiro (Contact Author)

University of Chicago - Marketing Management ( email )

Chicago, IL 60637
United States

HOME PAGE: http://www.chicagobooth.edu/faculty/directory/s/bradley-shapiro

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