Deregulating Direct-to-consumer Marketing of Prescription Drugs: Effects on Prescription and Over-the-counter Product Sales*

This paper examines the impact and interrelationships between direct-to-consumer (DTC) and physician-oriented marketing on the sales composition of the prescription (Rx) and over-the-counter (OTC) versions of antiulcer and heartburn medications. To understand better the implications for competition of the 1997 Food and Drug Administration’s policies regarding DTC marketing, as well as recent Rx-to-OTC switch approvals, we also examine the relationship between order-of-entry effects and marketing intensities. We find spillover effects of marketing for Rx drugs on same-brand OTC versions of the drugs. We also find that the ratio of cumulative marketing intensity (cumulative marketing efforts divided by cumulative sales) in the OTC segment increases monotonically with order of entry. Our regression results show that various marketing demand elasticities depend on order of entry. Our findings document the importance of nonprice competition in the OTC drug market and suggest that the recent deregulation of Rx DTC marketing enhances rivalry and facilitates competition. * This paper was presented at the University of Chicago Law School–Medical School conference Regulation of Medical Innovation and Pharmaceutical Markets, April 20–21, 2001. Research support from the National Science Foundation (to E.R.B.) and the Massachusetts Institute of Technology Program on the Pharmaceutical Industry (to E.R.B. and M.K.K.) is gratefully acknowledged, as is data support from Information Resources, Inc., J&J Merck Consumer Products, IMS Health, and Merck & Co. We have benefited from discussions with Richard Frank, Richard Manning, and Will Manning and from the comments of anonymous referees and the editor, Sam Peltzman. The views expressed in this paper are those of the authors only and do not necessarily reflect those of any institutions with which they are related or of any research sponsor. 692 the journal of law and economics