Advertising in Specialized Markets: Example from the U.S. Pharmaceutical Industry

This paper studies the usefulness of advertising to both consumers and experts in specialized markets like the prescription drugs, travel and real-estate markets where the consumers’ purchasing decisions are influenced by the experts (e.g., doctors, travel agents and real-estate agents). Inspired by the features of the prescription drugs market the study shows that direct-to-consumeradvertising (DTCA) does not substitute for advertising directed to physicians even when physician-advertising is only persuasive in nature. Furthermore, the paper analyzes possible advertising equilibriums in a two-firm setting and finds that it is possible to have a sub-game perfect, non-symmetric Nash Equilibrium in which only one firm advertises to the consumers and the other firm becomes a free-rider when, (i) the number of patients who are aware of treatment is very low, and (ii) there are very few patients who insist for a particular drug. Otherwise, for familiar diseases a non-advertising equilibrium is most likely. Finally, consumer advertising can have welfare improving implications depending on the disease types and patient characteristics. ∗Email:[email protected], Phone:(617)-552-6742 †My sincerest acknowledgments are due to Prof. Hideo Konishi for his guidance. I also wish to thank Prof. Frank Gollop and Prof. Ingela Alger for their valuable comments and suggestions.