Direct-to-consumer advertising and consumer welfare

The welfare implications of direct-to-consumer advertising (DTCA) have garnered considerable attention and are complicated since the consumer delegates some decision-making authority to the physician, who is exposed to advertising as well. In this paper, I develop and estimate a structural model that explains the demand side behavior in the market for prescription drugs. I then use the estimated parameters of the model to compute the impact on consumer welfare that results from changes in demand for cholesterol-reducing drugs due to increased expenditure in DTCA. The results of the policy analysis indicate increased levels of consumer welfare due to presence of DTCA in comparison to the absence of DTCA. The results also support the argument that DTCA helps bring under-diagnosed patients to the physicians' offices. Furthermore, the results of the estimation support the informative role of DTCA on the decision to seek care, and both informative and persuasive roles of physician advertising on the choice of the drug.