The Effects of Direct-to-Consumer Advertising in Prescription Drug Markets A Theoretical Model and Cost-Benefit Analysis

Date of Award

2006

Document Type

Thesis

Degree Name

Bachelors

Department

Social Sciences

First Advisor

Coe, Richard

Keywords

Health Economics, Direct-to-Consumer Advertising, DTCA, Prescription Drugs, Quality-Adjusted Life Years, QALYs

Area of Concentration

Economics

Abstract

In 1997, the FDA lifted regulations regarding the use of direct-to-consumer advertising (DTCA) by prescription drug firms. The ensuing increase in DTCA spending has re-kindled the debate about DTCA's effects on consumer and physician behavior. Critics claim DTCA confuses patients and causes physicians to over-prescribe medication, while proponents claim that its effects are largely informative, encouraging patients to seek treatment. I construct a theoretical model assuming that DTCA has purely market-expanding effects and generate predictions of prescription drug firm behavior, which I then test against empirical data. This model accurately predicts that firms with the largest market share will do the bulk of the advertising within a market and outlines conditions under which firms will coordinate their advertising. I also conduct a cost-benefit analysis of DTCA, demonstrating that the societal gains in Quality-Adjusted Life Years (QALYs) resulting from DTCA far outweigh the costs of advertising, consumed physician time, and QALY losses from side effects. These findings are robust under almost any rate of mis-prescription. Thus, I conclude that the behavior of prescription drug firms is consistent with a purely market-expanding effect from DTCA and that DTCA's effect on society is largely positive, with its benefits far outweighing its costs.

Rights

This bibliographic record is available under the Creative Commons CC0 public domain dedication. The New College of Florida, as creator of this bibliographic record, has waived all rights to it worldwide under copyright law, including all related and neighboring rights, to the extent allowed by law.

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