The Effect of Direct-to-Consumer Advertising of Prescription Drugs on Retail Gross Margins: Empirical Evidence and Public Policy Implications

Abstract

In the past decade, manufacturers of prescription drug products have begun advertising their products directly to consumers. Among the controversies surrounding this practice is its effect on prescription drug prices. The authors examine the effects of manufacturers’ direct-to-consumer advertising on retail gross margins to determine what the effect of such advertising has been on retailers’ margins. The authors test a hypothesis that is based on the “dual-stage ” theory, which describes a relationship between manufacturers’ advertising and the retail gross margins of advertised brands, and, on the basis of the results, discuss public policy implications.

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