Do Pharmaceutical Marketing Activities Raise Prices? Evidence from Five Major Therapeutic Classes

Abstract

The impact of direct-to-consumer (DTC) advertising of prescription drugs on consumers has become the focus of considerable debate. Given rising health care costs, the question whether DTC advertising and other forms of promotion increase the price of prescription drugs is particularly important. This study uses data on name brand drugs in five major therapy classes marketed in the United States during 2001–2005 to test the effect of DTC advertising and other promotional variables on the price elasticity of demand. The predictions of two competing theories on the economic effects of advertising are used as a basis for forming the hypotheses. The data indicate that, in general, there is not a significant relationship between DTC advertising and price elasticity in these five categories. Given the inverse relationship between elasticity of demand and price, the findings do not support the position that consumers pay higher prices as a result of DTC advertising in the pharmaceutical industry.