The US is somewhat unique in that we allow pharmaceutical ads to target consumers, albeit with plenty of FDA scrutiny. Is it doing any good? A new paper, "
Ask Your Doctor? Direct-to-Consumer Advertising of Pharmaceuticals," by Sinkinson and Starc estimates how responsive consumer demand is to TV advertising.
We find that a 10% increase in the number of a firm's ads leads to a 0.76% increase in revenue, while the same increase in rival advertising leads to a 0.55% decrease in firm revenue. Results also indicate that a 10% increase in category advertising produces a 0.2% revenue increase for non-advertised drugs.
These translate into elasticities of 0.076, -0.055 and 0.02, small but positive. Moreover, they claim that most of the effects come from new
customers patients, rather than existing
customers patients switching between competitors. For all of the econometricians out there, the clever identification strategy they use to get exogenous variation in the number of ads is the crowding out effect from local political advertising.
Although price discrimination might help consumers with low willingness or ability to purchase goods, which they would otherwise be excluded, patented pharmaceuticals and the affordability of drugs can be a matter of life or death. “The high cost associated with developing new drugs is the main justification for allowing their patentability and for the high prices that are often charged for them, despite the inevitable limitations on accessibility. As long as the development of new drugs is entrusted in the hands of profit-seeking private firms depending on patent protection, millions of people in developing countries inevitably will be priced out of the market” (Katz 2014).
ReplyDelete“Arguably, price discrimination could ameliorate this problem of accessibility and would immediately benefit both the manufacturer and the consumer in developing countries” (Katz 2014). “Differences in demand across countries will not reflect differences in the cross-elasticity of demand between the drug and its substitutes... In other words, variation in prices across countries will indeed reflect differences in ability to pay rather than differences in how competitive one market is compared to another” (Katz 2014).
Reference:
- Katz, A. (2014). The first sale doctrine and the economics of post-sale restraints. Brigham Young University Law Review, 2014(1), 55-142.
The advertising and promotions of products and service have become very useful and significant in today’s business world. I often wonder how much companies spend on advertising and marketing, especially when I see some of those glossy page magazines, like Macy’s or In the Swim or Yachts International, do they really earn back on those advertising expenditure. According to Economist John R. Hicks - the concept of advertising elasticity is also known as promotional elasticity of demand which is very helpful for all business. Thus, the objective and intention of advertising is to move the demand curve from left to right, and the magnitude of this shift may be measured by the elasticity of advertising expenditure.
ReplyDeleteAdvertising elasticity of demand can offer proposal and action to business about the demand quantity with response to the adjustment in advertisement expenditure. This can help business to emphasis more on advancing activities based on the projection of sales. Although we may know that the price elasticity of demand is constantly negative due to inverse relation between price and quantity, we can conclude by saying that income elasticity is positive for normal goods and negative for inferior goods. Thus the coefficient of advertising elasticity of demand is always positive.
Reference:
1. Frobe, McCann, Ward and Shor. (2014) Managerial Economics – A Problem Solving Approach.
2. Spotts, Harlan, E. & Chung Koo, Kim. (2005) Ivy Business Journal – Elasticity of Products Bias.
The advertising and promotions of products and service have become very useful and significant in today’s business world. I often wonder how much companies spend on advertising and marketing, especially when I see some of those glossy page magazines, like Macy’s or In the Swim or Yachts International, do they really earn back on those advertising expenditure. According to Economist John R. Hicks - the concept of advertising elasticity is also known as promotional elasticity of demand which is very helpful for all business. Thus, the objective and intention of advertising is to move the demand curve from left to right, and the magnitude of this shift may be measured by the elasticity of advertising expenditure.
ReplyDeleteAdvertising elasticity of demand can offer proposal and action to business about the demand quantity with response to the adjustment in advertisement expenditure. This can help business to emphasis more on advancing activities based on the projection of sales. Although we may know that the price elasticity of demand is constantly negative due to inverse relation between price and quantity, we can conclude by saying that income elasticity is positive for normal goods and negative for inferior goods. Thus the coefficient of advertising elasticity of demand is always positive.
Reference:
1. Frobe, McCann, Ward and Shor. (2014) Managerial Economics – A Problem Solving Approach.
2. Spotts, Harlan, E. & Chung Koo, Kim. (2005) Ivy Business Journal – Elasticity of Products Bias.
The combination of creativity and strategy is called advertising but an influential
ReplyDeleteadvertising penetrates its audience mind with belief.Advertising Services in delhi & seo companies in delhi ncr
The medical research advancements have been amazing in recent years. Specific drugs can now target symptoms in rare diseases. A disease is considered rare if it affects less than 200,000 American citizens. An individual may be undiagnosed or misdiagnosed due to the unlikely occurrence of the disease.
ReplyDeletePharmaceutical firms are now investing research dollars in rare diseases. “Drugmakers have been shifting much of their research away from pills for the millions to uncommon disorders that often kill prematurely because there are few or no treatment options.” (Johnson, L. 2013) Another benefit of this research is the advancement of medical knowledge. "There's so much that's learned from rare disease research that can be applied to other, prevalent disorders." (Johnson, L. 2013)
Pharmaceutical advertising provides education to consumers regarding specific disease and medicines to alleviate symptoms. The advertising has resulted in the growth in new patients rather than patient switching from competitors. This is beneficial for the advertiser (increase in sales and market size) and the consumer (remedy for symptoms.) The positive elasticity indicates that advertising is effective. The result from advertising is finding new consumers.
Reference:
Johnson, Linda (1/16/2013). Study: Hundreds of rare diseases in testing. USA Today.
Simple pricing is the “case of a single firm, selling a single product, at a single price” (Froeb & Ward, 2014). It is actually a fundamental concept, because the demand curve will accurately describe consumer behavior and how much consumers buy at this price. Elasticity calculation helps forecasting demand with very accurate results.
ReplyDeleteThe World Health Organization has programs regarding the study of the pharmaceutical pricing policies. For example, in 2006 they published a study regarding the lack of transparency in medicine markets in New Zealand.
“Pressure is building in U.S. policy circles for the federal government to take action to regulate the cost of drugs. At the same time, there is debate about the pros and cons of doing so” (Adamson, 2008). Americans pay slightly more than Europeans on medication. The costs for over the counter medication remain about the same for both sides across the ocean. Regulation may benefit aging Americans but in the same time should avoid cutting into the profits of pharmaceutical manufacturers, because most innovations in world market come from the private American pharmaceutical industry.
References:
Adamson, D. 2008. Regulating Drug Prices U.S. Policy Alternatives in a Global Context. Retrieved from http://www.rand.org
Froeb, L., McCann, B.T., Shor, M., Ward, M.R. 2014. Managerial Economics. A Problem Solving Approach.
Novick, Economics, ESC. FALL 2015
ReplyDeleteWhile pharmaceutical advertising allows the patient to be educated about their choices, From an ethical point of view, I am not necessarily on board with it. I understand the basic economic principle that “individual demand describes how many units and individual will purchase at a given price” and “Profit = (P-AC) x Q”. (Froeb)
I feel that I must state what we all know, that many of us have a prescription plan, and therefore, our price is fairly stagnate. A certain amount for a generic drug, and a certain amount for a non-formulary or brand name. The insurance company picks up the rest of the cost, and ..eventually..passes it on to the consumer (all of us – not just those on the drug) via premium hikes.
I also feel that the doctor should be educated about the medication, and should not take “suggestions” from the patient. .. “hey doc, I am having trouble sleeping at night, and I heard about lunesta. Can you prescribe it for me”… Versus, the “Hey doc, I am having trouble sleeping at night. What do you think the problem is and what can we do to fix it?”
However from an economical point of view – and strictly from the pharmaceutical standpoint – not considering prescription / health insurance -, I would have to say that because advertising has resulted in more patients taking the drug, the drug company receives increased profit and the patient receives the relief of certain symptoms. Positive price elasticity means that advertising works in generating profits for the drug company.
Froeb. 2016. Managerial Economics. Cengage Learning.