The pharmaceutical industry mainly markets its products through direct-to-consumer advertising and direct marketing to doctors - and lately, both types of marketing have come under fire.
Consumer advocates have accused the pharmaceutical industry of conducting aggressive and misleading advertising campaigns. Direct-to-consumer advertising is accused of misleading consumers and creating conditions to fit the drugs.
Marketing to doctors has also been under attack, from both inside and outside the industry. For example, Jerome Kassirer, a former editor of the New England Journal of Medicine, wants to see a stop to big pharmaceutical firms' direct marketing to doctors.
In response to the call to limit gift-giving (of everything from vacations to free samples), the pharmaceutical industry points to the public-health benefits of its marketing campaigns. Through gift-giving, the industry argues, doctors are kept up to date on new drugs, and the public is informed about the symptoms of potentially serious medical conditions.
This controversy hearkens back to the old debate over persuasion and information in advertising. If the marketing for drugs is informative in nature, then it is justified, as it increases consumers' welfare. But if the marketing of drugs is mostly uninformative and persuasive in nature, as its critics claim, then such marketing is detrimental to social welfare.
The question, then, is whether advertising in the pharmaceutical industry is informative, persuasive or perhaps both.
A characteristic feature of the pharmaceutical market is that the demand for medications is not ultimately dependent on consumers' tastes. In fact, most of the demand comes from the physicians who prescribe the drugs as well from the retail and hospital pharmacists who dispense the prescriptions.
In general, a doctor's decision to prescribe a drug is not influenced by its price. In fact, doctors tend to be less price-sensitive than their clients for two reasons. First, doctors are usually unaware of the prices charged by pharmacists for the drugs they prescribe. Secondly, physicians lack ready and well-organized information on the comparative effectiveness of branded drugs compared to their generic competition.
As a result, prescription choice is based mostly on industry custom within the peer community of doctors. This is because customary prescribing minimizes effort and also provides a legal defense in case of a malpractice suit. If doctors follow customary prescribing, it is harder to find them guilty of prescribing the wrong drug. All of this means that pharmaceutical firms have an incentive to target their marketing to doctors and physicians.
At one time, anti-substitution laws required pharmacists to fill a prescription as written. However, the increased efforts by the government to minimize health care expenditures as populations began to age, as well as the rise of managed care, led to the gradual repeal of anti-substitution laws. The last one was repealed in 1989. As a result, the pharmacist and the consumer play a role in deciding whether the prescription is filled as written by the doctor or if the generic equivalent is used instead.
In spite of this fact, it seems that generic substitution for branded drugs is relatively infrequent, while nearly all generic written prescriptions are filled as such. This suggests a high level of confidence in the doctor's choice on the part of the pharmacist and consumer.
The fact that consumers are allowed some degree of choice in choosing their prescriptions, however, has increased the pharmaceutical industry's incentive to market directly to the consumer.
There are two main views on the relationship between advertising and welfare. One side argues that advertising produces artificial product differentiation. It misinforms consumers about the true value and desirability of a particular good. It persuades consumers to buy a certain product at an unjustifiably higher price.
This view associates high advertising with higher market concentration and above-average profits. Advertising is seen as a barrier to entry and as a means through which firms increase their market power.
The opposing side argues that advertising is not persuasive in nature, but rather informative. Under this view, advertising is beneficial from the point of view of social welfare because it informs consumers, thus reducing firms' market power and increasing competition.
It seems that there is some truth to both views of the pharmaceutical industry's advertising. Pharmaceutical research continually introduces new and potentially life-saving products. Consequently, there are many potential gains from the rapid dissemination of information via advertising.
This is the view taken by the pharmaceutical industry in defense of the claim that it produces too much uninformative advertising. The industry argues that its marketing campaigns provide great public-health benefits, helping to keep doctors up to date on new drugs and inform the public about the symptoms of potentially serious medical conditions.
But there is also some truth to consumer advocates' claim that most pharmaceutical advertising is uninformative and even misleading. After all, pharmaceutical firms have an incentive to persuade doctors and consumers of the superiority of their drug. A strong and successful advertising campaign allows drug makers to sustain high prices even after the entry of generic competitors. It would thus appear that pharmaceutical advertising would serve to speed up the entry of new and superior drugs while retarding the entry of lower-priced generic substitutes.
Ultimately, it would seem that pharmaceutical advertising has two major functions - one informative in nature and the other persuasive. The informational function is evident in the very high promotional intensity given to newly-developed products, and especially in the intense marketing directed at doctors in the early stage of pharmaceutical firms' marketing campaigns. This type of advertising is beneficial since it makes doctors and patients aware of newly-developed scientific breakthroughs.
By contrast, the persuasive aspect of pharmaceutical advertising is evident in the longevity and intensity of the advertisements. That longevity serves to build up a strong brand name for the product, generating goodwill that in turn makes entry by generic brands harder and ensures long-term profits for the branded product.
This analysis is supported by Hurwitz and Caves' finding that leading brands' post-patent shares increase significantly with the number of years they have been able to market their product monopolistically under patent protection.
In fact, Hurwitz and Caves find that every year of effective patent life marketing adds another 1.6 percentage points of market share to an innovating firm with an average post-patent market share.
In the end, it would seem that both types of advertising are a necessary part of the pharmaceutical industry. It is hypocritical to critique some pharmaceutical advertising as persuasive while praising other parts as informative, since both types of advertising arise for the same reason: profit maximization.
So unless one is willing to make pharmaceutical research a completely public enterprise, one should accept the good with the bad; the informative with the persuasive. They are two sides of the same coin.
