This dissertation is composed of three essays that which examine firms' decisions in developing and marketing prescription drugs and government's role in regulating that process.
In the first essay, I look at two forms of promoting prescription drugs and how they interact. Because prescription drugs are chosen by the physician but consumed by the patient, firms have two potential targets for advertising. Advertising to doctors, called "detailing," has historically been more common, but in recent years direct-to-consumer (DTC) advertising has risen in prevalence. The question of how these two types of advertising interact is important for understanding the implications of controversial policies such as the bans on DTC advertising found in most countries. This essay develops an identification strategy exploiting policy differences between the United States and Canada to estimate a model of the joint effects of DTC advertising and detailing. I find a significant complementary effect between the two types: All else equal, for every additional dollar spent on DTC advertising, firms spend eight additional cents on detailing. This implies that DTC advertising bans decrease the effectiveness of detailing, and firms will do less as a result.
In the second essay, I examine how advertising can have significant effects on the composition of drug usage between branded and generic drugs. Because generic drugs provide a lower-cost means of delivering drug treatment, such compositional effects are relevant to policymakers facing limited health care budgets. In particular, I focus on the effect of DTC advertising and detailing around the time of patent expiration. I create a model with two firms, one branded and one generic, to capture firms' DTC advertising and detailing decisions over the life of a drug. I compare the model's predictions under different regulations on price and advertising with data from the US and Canada. The model's results are consistent with the empirical observations that detailing and DTC advertising are complementary strategies and that optimal detailing and DTC advertising are lower in an environment where lower prices are set by regulators. In addition, numerical results demonstrate that when consumers are reluctant to switch between the branded drug and the generic, the branded firm may choose to engage in a preemptive advertising campaign prior to patent expiration to limit market share grab by the entering generic or even to delay generic entry. This finding helps explain similar preemptive DTC advertising and detailing campaigns observed in the data.
Finally, in the third essay, I analyze the way in which governments optimally balance providing broad access to prescription drugs with creating incentives for innovation. Access and innovation are conflicting goals for price-regulating governments because a low price maximizes access but creates little incentive for innovation. To examine this issue, I model pharmaceutical price regulation as the result of a game between the governments of two countries of varying (economic) size. The agents of the game are a multinational pharmaceutical firm which produces a drug for the global market and the two national governments, each of which is assumed to maximize the welfare of the consumers residing within its borders. Prices are determined as a subgame perfect Nash equilibrium. Observing the two national prices, the firm then undertakes costly innovation to attain a drug quality level which is homogenous across the global market. My model produces the result that dividing the world's population into countries creates a free rider problem in which the public good of pharmaceutical innovation is underfunded. Moreover, whenever one of the two countries is considerably larger than the other, the unique Nash equilibrium is for the smaller country to set its drug price to marginal cost. This suggests that a large economy, such as the United States, will end up providing incentives for drug innovation all over the world.