Modeling the Effects of Promotional Efforts on Aggregate Pharmaceutical Demand: What We Know and Challenges for the Future - Innovation and Marketing in the Pharmaceutical Industry - page 596

The second research stream considers both the persuasive and informative
functions of promotion. It uses a structural approach where the informative function
is viewed as a means for decision makers to update their prior beliefs and reduce
uncertainty about the true quality of the new product (Narayanan et al. 2005 ).
Because this function of promotion affects demand by facilitating learning, it is also
called the indirect effect. The direct or persuasive effect then consists of all demand
effects that are not indirect (e.g., goodwill). One advantage is that this approach
allows for simultaneous occurrence of both effects. Currie and Park ( 2002 ) fi nd that
advertising is primarily informative and therefore benefi cial to society. Their results
show that fi rms advertise heavily when launching a new brand in order to provide
information about the benefi ts. This generates demand, which provides learning
opportunities which in turn means that fi rms can reduce their advertising, eventually
to zero, since continued learning is accrued from the increasing cumulative experi-
ence with the product. This is partially consistent with the fi ndings of Narayanan
et al. ( 2005 ) who report that marketing efforts have mainly indirect effects 6-14
months after the drug is launched, but that marketing expenditures thereafter are not
reduced to zero with the subsequent primacy of the persuasive function.
A related study by Azoulay ( 2002 ) takes a somewhat different approach. He does
not distinguish between the two functions of marketing but develops a separate
measure for scientifi c information and fi nds that its infl uence on pharmaceutical
demand is weaker than the effect of marketing efforts, but still signifi cant and
positive. Moreover, he fi nds that scientifi c information is an important driver of
marketing efforts, and concludes that marketing may perform an important informa-
tive function.
We conclude that both functions of promotion appear to play a role in the phar-
maceutical market. However, the empirical evidence on their relative importance
still generates mixed results. This is in agreement with the medical literature, where
a wide range of views is reported among health professionals about pharmaceutical
promotion: many perceive it as a useful and convenient source of information,
others fi nd that promotion may be misleading (Spurling et al. 2010 ).

20.2.4 The Role of Price

There are three reasons why the role of price is fundamentally different in the phar-
maceutical industry (compared to other markets). Firstly the industry is subject to
strict price regulation (Danzon and Chao 2000 ; Stremersch and Lemmens 2009 ),
Secondly price is affected by the special cost conditions which result from high
sunk R&D costs but virtually no marginal costs (Berndt et al. 1995 ). Finally the role
of price is strongly affected by the complexity that results from the multi-agent
structure of the pharmaceutical market (Gönül et al. 2001 ).
Intermediary agents such as insurance fi rms, health maintenance organizations,
or government agencies cover most of the cost of prescription drugs (Manchanda
et al. 2005 ), so that the effect of price also depends on the patients' insurance