Should product‐specific advertisement be regulated in pharmaceutical markets?

Abstract

AbstractThis paper examines the optimal content regulation of direct‐to‐consumer advertisement (DTCA) by comparing two forms of DTCA—product‐specific and category‐specific—and identifies a key tradeoff which underlies this policy debate. Our analysis suggests that the optimal form of DTCA depends crucially on the cost effectiveness of DTCA and the market‐size distortion induced by DTCA. When the cost of advertisement is high, there often exists a Pareto‐improving policy choice: category‐specific DTCA is preferred when the market‐size distortion is more severe while produce DTCA is preferred when it is less so. As the cost decreases, however, a conflict emerges between pharmaceutical firms and patients: firms are worse off under product‐specific DTCA while patients are better off. We also find that the physician's reluctance to persuade misinformed patients can actually alleviate the market‐size distortion and hence be welfare‐enhancing.