Direct to Consumer Advertising of Pharmaceutical Drugs: Information and Persuasion

We formally model direct to consumer advertising (DTCA) of prescription drugs and examine factors that determine a pharmaceutical firm's DTCA strategy. We highlight how the profitability of DTCA varies with the characteristics of the condition that the advertised drug treats, the incidence of the condition, and the signal value of symptoms, and risk factors. We account for the potential information benefits from DTCA as well as its potential to persuade consumers. From a welfare perspective there can be too much or too little private investment in advertising. Welfare is more likely to increase when the population is uninsured.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.