Prescription Prices and Direct to Consumer Advertising

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DESCRIPTION (Provided by applicant): The empirical work outlined in this proposal is designed to estimate the effects of direct to consumer (DTC) advertising of prescription drugs on the price of prescription drugs. In 1997, the Federal Trade Commission relaxed the rules governing DTC advertising, which resulted in a substantial increase in DTC advertising. Recently, DTC advertising has become a controversial national issue. Any evaluation of DTC advertising should take into account estimates of both its benefits and its costs to consumers. The benefits to consumers are health information. The costs to consumers are higher drug prices. However, there are no empirical estimates of the effect of the increased DTC advertising on prescription drug prices. The primary purpose of this proposal is to inform on the cost of DTC advertising by estimating what fraction of the increase in drug prices and spending can be attributed to the increased advertising. Advertising can be included in the demand for prescription drugs since it can increase the marginal utility of consumption. Advertising can also increase price by shifting demand or by decreasing the price elasticity of demand. If advertising differentiates the product and reduces the perception that substitutes are available, then demand becomes less price responsive. According to the Lerner rule, a more inelastic demand curve will result in a higher price, ceteris paribus. The data set will a monthly pool of all the available drugs in four therapeutic classes: 1) arthritis, 2) high cholesterol, 3) ulcers and 4) insomnia. These therapeutic classes were chosen since they include one or more drugs with relatively high levels of DTCA spending and other drugs with little or no DTCA. The estimation will be done separately for each therapeutic class. Two price variables and advertising data from television, radio and magazines will be collected. Endogeneity between promotional expenditures and sales is a concern. The primary approach to estimating consistent effects will make use of the exogenous shift in DTCA resulting from the FDA's policy change. This natural experiment is akin to a pre-post comparison conditioning on various other controls over time and across drugs in each class. Since the firm can be observed in two regimes, one where DTCA is restricted and one where it is not, this allows an exogenous comparison of a group of drugs with lower DTCA with a group of drugs with higher DTCA within a therapeutic class over time. A simulation of the effect of DTCA on drug prices and on increased sales of advertised drugs will be performed. This will be carried out for each therapeutic class. Three alternative DTCA scenarios will be simulated.