Direct-to-Consumer Advertising and Welfare

Since the Food and Drug Administration relaxed its regulation on prescription drug advertising in broadcast media in 1997, direct-to-consumer advertising (DTCA) expenditure of prescription drugs has increased over 200%. The welfare implications of such advertising have garnered considerable attention and are complicated since the consumer delegates some decision-making authority to the physician who is exposed to advertising as well. I develop and estimate a structural empirical framework that explains the effects of DTCA on the demand side behavior in the market for prescription drugs. Using the parameter estimates of the model, I then compute the change in consumer welfare that results from the changes in demand for cholesterol-reducing drugs due to DTCA. I explicitly model consumer and physician-directed advertising and their impact on three consumer choices. DTCA enters the model as informative advertising that influences the consumers' decision to seek health care while physician-directed advertising enters the model as both informative and persuasive advertising. The probability a consumer is informed about a drug is modeled as a function of DTCA expenditures, consumer attributes and consumer's exposure to television. The consumer is modeled as a utility maximizing agent who makes discrete and continuous choices. First, the consumer decides whether to seek care depending on his health state, budget constraint, and the information available to him about existing drugs. Second, the consumer chooses the drug and the quantity to receive depending on his health state, budget constraint, drug specific characteristics, and the physician's iv knowledge about existing drugs, which is captured through physician-directed advertising. The model is estimated using data on individual health care expenditures and demographics, brand level national advertising expenditures and sales, and consumers' exposure to media from four different sources. The estimation technique used is Generalized Method of Moments. The key findings of the study indicate increase in consumer welfare and increase in probability of seeking health care in the presence of DTCA than in the absence of DTCA. The structural estimates confirm informative effects of DTCA on the decision to seek health care, and both informative and persuasive effects of physician advertising on the choice of the drug. v To My Loving Father, and My Best Friend Dr.

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