Nemmers Prize Lecture
"Pharmaceutical Advertising in dynamic equilibrium"
Pharmaceutical companies promote prescription products by educating physicians and other healthcare professionals and providers about their products. This is commonly referred to as “detailing.” Direct-to-consumer (DTC) advertising of prescription drugs is controversial and quite rare. The United States and New Zealand are the only developed countries that allow it.
This paper analyzes four different drug classes in the United States. Advertising is analyzed as a function of profitability estimates, market conditions, and serially correlated unobservable variables representing both detailing and DTC activities. The implication of the models’ estimates for advertising expenditure are compared to both actual advertising data, and to the equilibria suggested by models of dynamic oligopolies with persistent sources of asymmetric information.
A number of counterfactual policies on direct-to-consumer advertising are then analyzed, including a ban and imposing a tax on sales with the associated revenues used for advertising the class of drugs without specifying brand names. In all scenarios, the amount of detailing activities are allowed to adjust to the new environment. The implications of the counterfactual policies on pharmaceutical company profits are of particular interest, as they are a major source of funds for research on new therapies.
Joint work with Pierre Dubois (Toulouse School of Economics)
About Ariel Pakes
Ariel Pakes received the Erwin Plein Nemmers Prize in Economics, honored for his “fundamental contributions to the development of the field of empirical industrial organization as it is applied to the study of market power, prices, mergers and productivity.” He is the Thomas Professor of Economics at Harvard University.
In his research, Pakes develops methods for empirically analyzing market responses to environmental and policy changes. He and his collaborators have developed ways to estimate and analyze consumer demand patterns that underlie pricing and product placement incentives, the production functions that underlie the analysis of firm productivity, and the investment decisions that underlie the evolution of markets over time.
Pakes and collaborators have demonstrated the usefulness of these tools by analyzing deregulation in the telecommunication industry, demand and product placement decisions in the auto industry, the impact of incentives on doctors’ hospital allocations and consumers’ choices of health insurance plans, the evolution of bidding strategies in a new electric utility market and the development of improved consumer price indices. These tools have become a mainstay of the analysis of market interactions in much of economics and are often employed by consultancies and regulatory agencies to analyze the likely outcomes of regulatory decisions. They have also been used for internal firm planning.
Pakes is a Fellow of the Econometric Society and the American Academy of Arts and Sciences and a Member of the National Academy of Sciences. He has received the Frisch Medal of the Econometric Society, the Jean-Jacques Laffont Prize for research that integrates theory with empirical analysis and the BBVA Frontiers of Knowledge Award in Economics, Finance and Management. Pakes is a laureate of the Web of Science and an honoree of the American Antitrust Institute for Outstanding Antitrust Achievement in Economics. He also is a distinguished fellow of both the Industrial Organization Society and of the American Economic Association. Pakes is a founding member of Microeconomic Insights, a home for summaries of microeconomic research that informs the public about microeconomic policy issues.