Persuasion or Information? Promotion and the Shares of Brand Name and Generic Pharmaceuticals

Abstract

ECONOMISTS have vigorously debated whether advertising and other messages supplied by sellers to buyers represent the efficient provision of information or the exploitation of buyers' imperfect access to it. Many economists now agree that each view commands some truth. Advertising should convey information efficiently where the buyer can easily verify it. But it may engender inefficient rent-seeking outlays by producers able to hamper buyers' gaining of information from alternative sources. For example, if buyers sample product information randomly, an incumbent can "jam" the channels through which entrants transmit their messages by loading the sampled population with messages of his own. Or the incumbent's messages can reinforce buyers' habits so as to reduce their prior expectations of the value of trying an alternative brand.2 If sales promotion is effective (by whatever means) in causing buyers to shift among competing products, it becomes a form of rent-seeking outlay by which sellers bid for the available customers.3 The problem for empirical research is to determine the extent to which seller-supplied information pursues a rent-seeking goal and thus incurs social costs. Those costs must be set against the efficiency advantage of sellers (relative to buyers or