Advertising in Response to Entry: An Empirical Analysis of the Prescription Drug Market

Abstract

Rationale: Because pharmaceutical firms often engage in non-price competition, understanding the strategic role of advertising in market competition is important not only to marketing managers when formulating marketing strategy but also to policymakers when setting pharmaceutical advertising regulations. Objective: This analysis examines how pharmaceutical firms advertise when faced with a competing new entrant. Methods: Quarterly advertising and sales data from leaders of eight therapeutic markets (asthma, depression, gastric/duodenal ulcer, dyslipidemia, migraine, obesity, seizure disorder, Parkinson's disease) from Jan 1995 to Dec 2001 were obtained from Scott-Levin Market Research and Sales Performance Audits. New products were classified across two dimensions: 1) whether the product is a new chemical entity; and 2) whether the new product had priority status for FDA review (an indication of significant therapeutic advance). Random effects generalized least squares regression was used to estimate the effect of new product novelty on incumbent firms' advertising expenditures while controlling for prior advertising expenditures, market characteristics and incumbent market position. An alpha level of 0.05 was used. Results: The number of product entries and the presence of a new chemical entity entrant had no significant effect on advertising expenditures, but incumbent firms significantly decreased their advertising expenditures after the entry of FDA priority review products. Incumbents with larger market shares, in less concentrated or growing markets had significantly lower advertising expenditures. Advertising expenditures significantly decreased with time on market. On average, market leaders had significantly higher advertising expenditures compared to non-leaders. Conclusion: Incumbent firms' advertising activities are mostly determined by market characteristics and market position. In response to new products with significant therapeutic advance, incumbents may decrease their advertising activities to minimize spillover effects.