Controlling direct-to-consumer advertising, professional promotion and the price of pharmaceutical drugs

Direct-to-consumer (DTC) advertising is the most visible and controversial part of contact between patients and the pharmaceutical manufacturers but it is only part of the current promotional mix. Advertising in medical journals, detailing (direct sales calls on physicians) and distribution of free samples are all used along with DTC advertising to induce product demand. In this paper, I exploit a new data set on pharmaceutical promotion (Donohue, Cevasco, and Rosenthal 2007) to estimate two state space models: one model explains the dynamics of pharmaceutical promotion and another investigates the impact of pharmaceutical promotion on the market for pharmaceutical products. Simulation results suggest that limitations on professional detailing and free samples (not DTC advertising) could reduce cyclical instability of pharmaceutical promotion. However, the pharmaceutical market does not behave as a competitive market, that is, while promotion increases sales, prices have no statistically significant negative feedback effect on sales. As a result, promotional controls will reduce sales but not prices. Market failure suggests a range of interventions that might be applied to pharmaceutical pricing.