The endogenous modeling of the effect of direct‐to‐consumer advertising in prescription drugs

Abstract

Purpose

The purpose of this paper is to study two major research objectives. The first objective is to investigate the effect of direct‐to‐consumer advertising (DTCA) on market share in the pharmaceutical drugs industry by modeling advertising decision of the firm as an endogenous decision. The second objective is to examine and determine whether there is any empirical support for the argument advanced by medical insurers and providers that DTCA advertising encourages brand switching.

Design/methodology/approach

Data on sales, price, DTCA, direct‐to‐physician advertising (DTPA), and average cost of consumption per usage for three prescription (Rx) drugs categories was obtained for the period, January 1998 to December 1999. A simultaneous model of market share and DTCA is proposed. Market share is modeled as a function of DTCA, price, the intensity of competition as represented by the number of competitive brands, and DTPA. DTCA is modeled as a function of its lagged market share (with the optimal number of lags to be determined empirically), and the average cost per consumption usage.

Findings

This paper finds that there is a positive and significant effect of DTCA on market share when advertising decision is modeled as an endogenous decision. The empirical results suggest brand switching by consumers. There is, thus, some evidentiary support for the argument made by the insurance providers.

Originality/value

This paper is unique for two reasons. First, the paper estimates the effects of DTCA in a simultaneous model accounting for endogenous decision by the firm. Therefore, the estimates are unbiased and robust. Second, the paper investigates the important public policy question of the social welfare of DTCA.

Citation

Kalyanaram, G.K. (2009), "The endogenous modeling of the effect of direct‐to‐consumer advertising in prescription drugs", International Journal of Pharmaceutical and Healthcare Marketing, Vol. 3 No. 2, pp. 137-148. https://doi.org/10.1108/17506120910971713