Welfare Effects of Pharmaceutical Informative Advertising

Pharmaceutical markets are characterized by a high degree of innovation, complexity and uncertainty, especially markets of idiosyncratic symptomatolgy and response to treatment such as the antidepressant market. It may, therefore, be unreasonable to assume that consumers are aware of all antidepressants for sale at the time of purchase, as is the case in traditional models of consumer choice. Such an assumption will bias demand curves towards being more elastic and the evaluation of consumer welfare downwards. This paper, therefore, aims at analyzing and evaluating the effects of promotions by pharmaceutical firms on patient welfare taking into account the interaction of multiple agents (patients, physicians, insurance companies and pharmaceutical companies) in the decision process. I present an empirical discrete-choice model of limited information, where advertising influences the set of drugs from which a purchase choice is made. The estimation technique incorporates both macro- and micro-level data. Estimation results indicate that pharmaceutical firms use advertising media to target high-income households and households with more comprehensive prescription drug insurance schemes through their physicians or directly. Model comparison shows that limited information leads to less elastic demand curves and larger estimates of patient welfare due to pharmaceutical innovation that exacerbate the moral hazard issue that coexists with insurance coverage.