“The Effect of Direct-to-Physician Advertising on Prescribing Decisions under Quality Uncertainty: A Structural Modeling Approach” by Andrew CHING
University of Wisconsin-Madison
The role of informative and persuasive advertising has been the focus of policy debate in the pharmaceutical industry. This paper provides a structural approach to quantify their relative significance in affecting physicians' prescribing behavior. Using the data for ACE-inhibitor with diuretic in Canada, I estimate the risk-aversion of patients, the rate of learning, and the impact of advertising on providing information and persuasion, respectively. The estimates show that patients are risk-averse, and it takes time for the market to learn the true quality of new brand-name drugs. I also find that the main role of advertising is informative in the market of ACE-inhibitor with diuretic. The model, together with the estimates, provides a simple explanation for why a firm increases its advertising effort when the demand for its product increases. As experience signals reveal that the quality of a product is superior to its rivals, it provides a strong incentive for the firm to disseminate the information via informative advertising.