Venue: The Fuqua School of Business, Duke University, 1 Towerview Drive, Durham, NC 27708-0120
Presentation
The Effect of Direct-to-Consumer Advertising on Prescription Drug Prices
Direct-to-consumer advertising (DTCA) for drugs has increased over the past decade from $200 million to $4 billion. However, little is know of the effect of DTCA on drug prices. Using insurance claims across 212 markets, we examine the impact of DTCA on the transacted prices of 17 million prescriptions for 177 drugs in 2001-2002. Controlling for pharmacy, drug, and market fixed effects over 8 quarters, we find that an increase in quarterly DTCA per drug from $0 to the conditional mean advertising level of $6,000 per 100,000 capita increased the wholesale price by 4.6%, but reduced the mean retail price to the consumer by 1.4%. Thus, the pharmacy retail price markup per prescription declined by 7.1% and the pharmacy profit margin per prescription declined by 5.6%. Moreover, this increase in DTCA decreased price dispersion: the drug's within-market range between the highest and lowest retail price narrowed by 23.4%, or $8. These results support our theoretical Nash bargaining model that shows that increased DTCA for a specific drug signals to the insurers which drug they should focus their attention for more aggressive price negotiations. This research suggests that a ban on DTCA may harm consumers by raising retail prices and increasing price dispersion.