The Impact of DTC Advertising and Physician Promotions On

The Impact of DTC Advertising and Physician Promotions on

Treatment Incidence and Brand Choice Decisions

Ying Xie

RutgersUniversity

Lakshman Krishnamurthi

KelloggSchool of Management

Northwestern University

Working Paper No: RBS-MKT-2004-01

This work cannot be cited without the authors' permission

Abstract

This paper addresses a set of questions regarding the management of promotion mix in a marketing situation where the choice and consumption are separate, with an application to the prescription pharmaceutical industry. The focal research question concerns the effects of two different types of promotional activities, namely, the traditional physician promotions and the newer direct-to-consumer (DTC) drug advertising, on the demand for prescription pharmaceutical products. Two sequential decisions are involved in the prescription process. First, the individual has to decide to visit a doctor (the treatment incidence decision), and second, the doctor makes a decision to prescribe a specific drug or not (the prescription choice decision). The effects of the two types of promotional activities on the two decisions are explicitly modeled in the analysis. Moreover, we distinguish between two different types of DTC drug ads, i.e., non-brand specific ads and brand specific ads, in terms of their relative impacts on stimulating patient visits to doctors for a particular condition, as well as their effects on brand choice within the therapeutic category conditional on patient visits.

In particular, the following questions are studied in the paper: (1) What impact do the non-brand specific DTC drug ads and the brand specific DTC drug ads have on patient treatment incidence decisions? (2) What impact do DTC ads and physician promotions have on physician prescription choice? Is there any synergy between DTC drug ads and physician promotions? (3) Is there any spillover of DTC drug ads from one firm to its competitors? What type of ads generates more spillover effect, the non-branded DTC ads, or the branded DTC ads? (4) Does the effect of DTC advertising and physician promotions vary across therapeutic categories?

We develop a structural model of the demand for branded prescription drugs within a specific therapeutic market. The framework incorporates a binary choice model of treatment incidence as well as a multinomial choice model of market share. For both models, we have used the random coefficient logit specification.

The model is estimated by using monthly patient visits, sales and marketing data in two chronical therapeutic categories: anti-depressants and oral anti-diabetics. The results indicate that DTC drug ads have a positive effect in encouraging patients to seek for treatment, and non-brand specific ads are more effective than brand specific ads in influencing patient treatment incidence decisions. We also find that physician promotions are the main driver of physician prescription choice decisions, although brand specific DTC drug ads have a smaller positive effect in one of the two categories that we analyzed in the paper. There is a strong spillover effect of non-brand DTC drug ads, implying that this type of ads benefit all firms that participate in the therapeutic category. We also find the magnitude of these effects varies considerably across these two therapeutic categories. Using the estimated parameters, we calculate the elasticity and ROI measures for each promotional instrument to shed light on the resource allocation problem for the pharmaceutical executives.