Positive Spillovers and Free Riding in Advertising of Prescription Pharmaceuticals: The Case of Antidepressants

Television advertising of prescription drugs is controversial, and it remains illegal in all but two countries. Much of the opposition stems from concerns that advertising directly to consumers may inefficiently distort prescribing patterns toward the advertised product. Despite the controversy surrounding the practice, its effects are not well understood. Exploiting a discontinuity in advertising along the borders of television markets, I estimate that television advertising of prescription antidepressants exhibits significant positive spillovers on rivals’ demand. I then construct and estimate a multi-stage demand model that allows advertising to be pure category expansion, pure business stealing or some of each. Estimated parameters indicate that advertising has strong market level demand effects that tend to dominate business stealing effects. Spillovers are both large and persistent. Using these estimates and a simple supply model, I explore the consequences of the positive spillovers on firm advertising choice. I solve for the Markov Perfect Equilibrium and compare that to counterfactuals whereby firms work together to set advertising. In a full industry cooperative advertising campaign, simulations suggest that the co-operative would produce four times as much advertising as the competitive equilibrium, resulting in a 18 percent increase in category size and a 14 percent increase in category profits.