Pharmaceutical Pricing in Dynamic Equilibrium
Abstract, joint with Pierre Dubois:
Direct to consumer advertising of prescription pharmaceuticals (DTCA) can foster the use of new innovative treatments and accelerate access to better medicine for patients, especially those who do not regularly see doctors. However DTCA can also result in excessive use and is a competitive tool for business stealing which shifts consumer spending between drugs with no notable welfare effects. This tradeoff has been evaluated differently in different countries and time periods. Currently only the U.S. (since 1997 on TV) and New Zealand allow DTCA. This paper builds and estimates two dynamic models of this advertising. Both assume that firms chose advertising to maximize their value, but only one assumes that the firms' perceptions of the discounted value of returns generated by the advertising are in any sense “correct” or "equilibrium perceptions”. We compare the in-sample predictions of the two models, and then use the equilibrium model to do out-of-sample (or counterfactual) evaluation of alternative advertising regulations. The notion of equilibrium used is Experience Based Equilibrium and the paper introduces methodology for bringing that equilibrium notion to data and computing its policies. A final section considers our counterfactual results in the context of the current discussion of policy options for the pharmaceutical industry.