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The B.E. Journal of Economic Analysis & Policy

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Volume 8, Issue 2 (Jul 2008)


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Advertising, Free-Riding, and Price Differences in the Market for Prescription Drugs

Ismo Erkki Linnosmaa
  • 1University of Kuopio,
Published Online: 2008-07-25 | DOI: https://doi.org/10.2202/1935-1682.1819


This article studies the pricing and advertising of prescription drugs in a duopoly market. If advertising is banned, decisions of the prescribing physician are price-sensitive. The emerging market equilibrium is characterized by marginal-cost pricing and normal profits. The introduction of advertising, and physician-oriented advertising (detailing) in particular, creates market power and asymmetric pricing and advertising behavior. In an equilibrium, one firm chooses maximum detailing and the rival firm invests less in physician-oriented advertising. The asymmetric detailing strategies explain the observed price differences in the market for prescription drugs. The model also predicts free-riding in DTC advertising. According to the predictions of the model, the free-rider is the firm with a low level of physician-oriented advertising. The firm with maximum detailing invests money in DTC advertising, expanding the market for prescription drugs.

Keywords: advertising; pricing; pharmaceuticals

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Published Online: 2008-07-25

Citation Information: The B.E. Journal of Economic Analysis & Policy, ISSN (Online) 1935-1682, DOI: https://doi.org/10.2202/1935-1682.1819. Export Citation

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