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A 3-stage model for assessing the probable economic effects of direct-to-consumer advertising of pharmaceuticals

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The pharmaceutical industry employs a variety of marketing strategies that have previously been directed primarily toward physicians. However, mass media direct-to-consumer (DTC) advertising of prescription drugs has emerged as a ubiquitous
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   ommentary A 3-Stage Model for Assessing the Probable Economic Effects of Direct-to-Consumer Advertising of Pharmaceuticals Ronald J. Vogel PhD Sulabha Ramachandran MS and Woodie M. Zachry III PhD Center for Health Outcomes and PharmacoEconomic Research, College of Pharmacy, The University of Arizona, Tucson, Arizona ABSTRACT Background: The pharmaceutical industry employs a variety of marketing strategies that have previously been directed primarily toward physicians. How- ever, mass media direct-to-consumer (DTC) advertising of prescription drugs has emerged as a ubiquitous promotional strategy. Objective: This article explores the economics of DTC advertising in greater depth than has been done in the past by using a 3-stage economic model to as- sess the pertinent literature and to show the probable effects of DTC advertising in the United States. Methods: Economics literature on the subject was searched using the Journal of Economic Literature. Health services literature was searched using computer call- back devices. Results: Spending on DTC advertising in the United States increased from $17 million in 1985 to $2.5 billion in 2000. Proponents of DTC advertising claim that it provides valuable product-related information to health care professionals and patients, may contribute to better use of medications, and helps patients take charge of their own health care. Opponents argue that DTC advertising provides misleading messages rather than well-balanced, evidence-based information. The literature is replete with opinions about the effects of prescription drug advertis- ing on pharmaceutical drug prices and physician-prescribing patterns, but few studies have addressed the issues beyond opinion surveys. The economic litera- ture on advertising effects in other markets, however, may provide insight. Accepted for publication November 8, 2002. Printed in the USA. Reproduction in whole or part is not permitted. Copyright © 2003 Excerpta Medica, Inc. 0149-2918/03/$ 19 O0 309  CLINICAL THERAPEUTICS ® Conclusion: DTC advertising indirectly affects the price and the quantity of production of pharmaceuticals via its effect on changes in consumer demand. (Clin Ther. 2003;25:309-329) Copyright © 2003 Excerpta Medica, Inc. Key words: pharmacoeconomics, pharmaceutical advertising, consumer. INTRODUCTION Although advertising represents only one component of the total cost of selling a product, it is an important part of the marketing strategy for many pharmaceuti- cal firms. Marketing has always played a role in the budgets of firms. The pre- scription drug industry employs an atypical combination of marketing effort, us- ing personal detailing (ie, professional sales calls by manufacturer representatives), free samples to prescribing clinicians (eg, physicians, nurse practitioners, physi- cian assistants, pharmacists), professional journal advertising, and direct-to- consumer (DTC) drug advertising. The marketing strategies employed in the pharmaceutical industry sharply contrast with those used in other industries. One of the primary reasons for this difference is that, in the prescription drug market, a distinct breach exists in the traditional buy- ing process. The decision maker is the physician who chooses among a wide array of drug alternatives but is not the user of the drugs. Therefore, it is conceptually more difficult to define the consumer in such transactions. However, the role of the physi- cian as the patientE principal agent cannot be ignored; because physicians serve as ra- tional and objective decision makers on behalf of consumers (patients) and payers (health insurers and patients), the marketing effort by pharmaceutical firms has his- torically been directed at physicians. Over the last few years, however, mass media DTC advertising of prescription medicines has emerged as a new marketing strategy. The purpose of this article is to explore the economics of DTC advertising in greater depth than has been done previously. Accordingly, we first provide de- scriptive data on the extent of DTC advertising in the pharmaceutical industry. The subsequent sections review the economics of advertising in general and the economics of pharmaceutical advertising in particular. In the fourth section, we construct a 3-stage economic model that shows the theoretical effects of DTC ad- vertising on pharmaceutical sales, prices, and profits. In stages 2 and 3 of the model, we assume that DTC advertising has both a large fixed and a smaller vari- able cost component. We conclude with some policy and research implications. MATERIALS AND METHODS Economics literature on the subject was searched using the Journal of Economic Literature. Health services literature was searched using computer call-back de- vices. The model was derived from generalized economics theory. 310  R.J. Vogel et al. SPENDING ON DIRECT-TO-CONSUMER ADVERTISING Spending on DTC advertising in the United States increased from $17 million in 1985 to $2.5 billion in 2000.1'2 Although DTC advertising has been utilized by pharmaceutical manufacturers since the early 1980s, product-specific advertising before 1997 was largely restricted to print advertisements. Manufacturers could broadcast help-seeking advertisements (ie, disease description but not treatment description) and reminder advertisements (ie, product name but no indication), but interpretations of the adequate provision of approved package labeling pre- vented product-specific advertising (product name and indication) from being broadcast. However, in 1997, partially in response to the proliferation of re- minder advertisements of questionable consumer value, the US Food and Drug Administration (FDA) released a draft guidance statement to the industry about the format in which product-specific advertisements could be broadcast) This draft guidance was adapted and formalized in 1999. These relatively recent de- velopments have arguably contributed to the growth of DTC pharmaceutical ad- vertising to become one of the most visible and controversial developments in the health care marketplace. Table I shows the distribution of promotional spending on prescription drugs for the years 1996 and 2000. 4 Total promotional spending was $9164.3 million in 1996 and $15,708.2 million in 2000. In both years, sampling (valued at retail prices) comprised >50% of promotional expenditures, but the percentage declined slightly in 2000, as did detailing and professional journal advertising. DTC adver- tising increased from 8.6% of promotional spending in 1996 to 15.7% in 2000. The last column in Table I shows that the average annual percent change in DTC advertising expenditures between 1996 and 2000 was 32.9%, much larger than the annual percent change in the other types of promotional expenditures. How- ever, the release of the 1997 broadcast DTC draft guidance statement 3 may account Table I. Distribution of promotional spending on prescription drugs in 1996 and 2000. 4 Total Promotion Average Annual Change, Expenditure 1996 2000 1996-2000, % Promotional activity, % Sampling 53.5 50.6 12.8 Detailing 32.8 30.6 12.4 Direct-to-consumer advertising 8.6 15.7 32.9 Professional journal advertising 5.0 3. I 1.4 All activities 100.0 100.0 14.4 Total promotional spending, 21 millions of dollars 9164.3 15,708.2 311  CLINICAL THERAPEUTICS ® for some of this dramatic increase because the statement may have promoted the use of more expensive advertising options relative to print advertising. Largely because DTC advertising of prescription drugs is such a recent phenom- enon, its impact is not well understood, even though it has generated much dis- cussion. In contrast with promotions aimed at physicians, advertising targeted at patients has been clearly visible, which has fueled a heated policy debate about its social merits. DTC has been accused of driving up drug prices by increasing phar- maceutical company costs. 5,6 There is no discernible direct link between increased DTC spending and drug prices, although limited evidence suggests some return on investment by increases in quantities sold] In contrast, some analysts give DTC ad- vertising credit for empowering consumers with information that enables them to seek effective treatment for problems sooner than they would have done other- wise. 8 To better understand the impact of DTC prescription drug advertising, it is imperative to first understand some of the underlying economics of advertising. 9,m THE ECONOMIC LITERATURE ON ADVERTISING The role of promotional expenditures is controversial. Many people oppose large advertising expenditures, not only in the drug industry but also in other fields. It is thought of as being wasteful, misleading, and manipulating consumers into purchasing products they do not need. In perfectly competitive markets, adver- tising is viewed as unnecessary because buyers have perfect information and products are homogeneous. 11 In the 19th century, one of the pillars of modern economics, Alfred Marshall, made the distinction between what he saw as the 2 roles of advertising: the constructive role and the socially wasteful role. 12 Ac- cording to Marshall, advertising is constructive when it imparts information to consumers so that they may satisfy their wants with less resource consumption. Advertising is wasteful from a societal perspective when it presents little infor- mation and serves only to redistribute consumption from one product to another in the same class. Similarly, there are 2 theoretically divergent viewpoints about the economic effects of advertising. Market Power Model According to this model, advertising is viewed as a persuasive tool. Proponents of the market power model argue that advertising often creates the impression of higher quality where only marginal (or no) product differences exist. In many cases, marketers use advertising to communicate marginal product benefits to consumers in an attempt to justify price premiums. These product attributes can be communicated overtly (eg, most recommended by pharmacists ) or through more subtle messages (eg, visual allusions to strength or popularity). 13 This is thought to have an effect on consumer tastes and establish brand loyalty. Thus, 3 2  R.J. Vogel et al. the advertised product faces a less elastic demand. Consequently, consumer price sensitivity is decreased, suggesting that advertising results in higher prices as man- ufacturers respond to this decreased price sensitivity. Also, according to this model, advertising serves as a barrier to entry and has an anticompetitive effect. Con- sumers are reluctant to try new products of unknown quality, and this experience- based asymmetry between established and new products may be exacerbated in the presence of heavy advertising by established firms. The advertising-as- persuasion view has been developed through a number of research studies and finds considerable support in one branch of the literature. 14,15 Kaldor 16 advances this view and stresses that advertising leads to a more con- centrated market, due to the presence of an advertising scale economy. Bain ~r and Comanor and Wilson 18 also offer empirical support for the advertising-as- persuasion view. Traditionally, advertising within the drug industry has been an- alyzed within a similar context. 19 2° Within therapeutic markets where the prod- ucts are considered to be relatively homogeneous, large promotional expenditures are mainly seen as an attempt by the firm to create product differentiation and brand loyalties in the minds of physicians. Government investigations of the pharmaceutical industry stress that intensive advertising results in excessive use of high-priced, heavily promoted brand-name products even though equivalent, low-priced products are available. 21-23 Information Model This model assumes that price elasticity is a function of consumer awareness and of qualitative knowledge about close brand substitutes. Promotion informs the consumer of alternatives and alternative attributes, making competition at the retail level more vigorous. Customers take into account all attributes of a prod- uct, including price, when making an informed decision. Even if the consumers have some familiarity with existing products, a new product gains entry into the market based on information about comparative product attributes and whether they are superior to existing alternatives. In this manner, a new product's entry into the market is facilitated by filling a need rather than facing barriers to mar- ket entry due to brand loyalty. As opposed to the market power model, in the in- formation model, the mere threat of entry by a competitor drives down prices to gain an advantage over the new product and other competitors. 2~ The main premise of this model is that advertising makes consumers more aware of viable alternatives, thus increasing the consideration set. Consequently, this growth in available alternatives increases the price sensitivity of consumers, which then leads to a decrease in prices as manufacturers of goods begin to differentiate prod- ucts. Price differentiation may be stronger for products with very similar attri- butes, such as me too products (ie, nonunique secondary entrants patterned af- ter an srcinator product). Several studies on products other than pharmaceuticals 3]3
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