An investigation of first-mover advantage in pharmaceutical advertising
- Presenter:
Chair: Richard Frank; Discussant: Richard Frank Tue June 6, 2006 13:45-15:15 Room 309
Rationale: Pharmaceuticals are experience goods because physicians often choose medications based on their clinical experience and they may be reluctant to try a new product due to uncertainty about its quality. Because of imperfect information, products that enter the market earlier may have a competitive advantage over new entrants.
Objective: The objective of this study was to determine if there is an asymmetry in the effectiveness of advertising between earlier and later entrants that would support the presence of a first-mover advantage in pharmaceutical advertising.
Study Design: Effectiveness of advertising was evaluated using estimates of advertising elasticity of demand (i.e., the percent change in a product’s sales per each percent change in its advertising expenditures). Advertising elasticity of demand of existing products and new entrants in the periods following new entry was estimated using time and disease fixed effects estimation. Because the effect of advertising on product sales is not immediate, one-period and two-period lag models were estimated. For instance, if a new product entered the market during period t, the advertising expenditures for existing products and the new product in period t+1 or t+2 were analyzed. The logarithm of a product’s sales was regressed on its own advertising expenditure, the total advertising expenditure of competing products in the same market, the number of competing products, number of years the product has been on market, a dummy variable indicating whether the product is a new entrant, and an interaction term between the dummy variable and the product’s own advertising expenditure.
Populations Studied: Advertising expenditure and product sales data were obtained from Scott-Levin Market Research Audit data. New product entry data were from United States Pharmacopeia Drug Information, Orange Book and the Scott-Levin Market Research Audit data. Data from January 1995 to December 2001 were used. The analysis was conducted on a quarterly basis. Products from eight therapy markets were examined: asthma, migraine, obesity, Parkinson’s disease, seizure, depression, lipid disorder, and gastric and duodenal ulcer.
Results: In both lag models, product sales significantly increased with a product’s own advertising expenditure, and significantly decreased with the total advertising expenditure of competing products and the number of competing products. For existing products, advertising elasticity of demand was estimated to be 0.068% in the one-period lag model and 0.062% in the two-period lag model. The elasticity estimates for new entrants was lower at 0.046% and 0.044%, respectively but not significantly different from existing products. Comparing results of the two lag models, advertising elasticity of demand depreciated at 8.7% per quarter.
Conclusion: The analysis did not find any significant first-mover advantage in the effectiveness of advertising between earlier and later entrants that would support the entry deterrence effect of advertising in the pharmaceutical market.
