A dynamic model of price competition and promotion in prescription drug markets

In prescription drug markets, the effects of advertising on demand for the drug category and for specific brands have been studied, and the interaction between price and non-price promotions, acting on demand for the drug, is well established. More recently, supply-side decisions such as competitive pricing strategies between rival firms in the same therapeutic category, and the interaction between them and consumer advertising have been examined. The study extends the research on the relationship between competitive pricing strategies and direct-to-consumer advertising (DTCA) by developing and estimating a dynamic model in which sales is influenced by a combination of consumer advertising, detailing, and pricing. The model is estimated using US data from two medical therapeutic categories. One of these datasets has been used in estimation of a static model in a recently published study, and we compare the results of our dynamic model with the static model results. A dynamic model is appropriate for a market where there is a limited period and planning horizon for recovering the costs of drug development before a branded prescription drug loses its patent protection. The relationship between DTCA, detailing, and pricing under different competitive strategies is examined empirically. It is found that the dynamic model can contradict a basic conclusion of a static model, regarding mode of competitive pricing behavior. The relationship between amount and type of DTCA and competitive pricing strategy is as found in previous studies. There are implications for the marketing of pharmaceutical brands during their period of patent protection.