Current Issue Summary
Sept 2020 (Vol. 60, Issue 3):
The Relationship between Competitive Pricing and Direct-to-Consumer Advertising: How to Manage DTC Advertising of Rx Drugs in an Integrated Marketing Mix Strategy
When there is an oligopoly with a few big players competing for share of a growing market, competitive pricing strategies are especially important. “As such,” Abhik Roy and Mary E. Schramm (both at Quinnipiac University) observe, “the oligopolistic nature of the U.S. pharmaceutical industry presents its members with a unique opportunity to leverage the interaction between competitive pricing strategy and promotion strategy.” Whereas earlier research examined the role of direct-to-consumer advertising (DTCA) in influencing demand and sales, “this study emphasizes the impact of consumer advertising on a supply-side phenomenon, the setting of prices relative to those of close competitors.” The work essentially presents a “price-based explanation for the ubiquitous use of DTCA in a market where spending on such advertising might appear wasteful.”
Roy and Schramm proposed that “DTCA and, more specifically, the amount spent on DTCA and the creative strategy utilized are used as a coordinating mechanism, whereby a company signals its willingness to act as a price leader.” The signal is recognized when the company spends large amounts on mass-media advertising, and uses advertising messages that promote the product category, instead of just focusing on the benefits of the company’s own brand within the category. “If a rival company recognizes and acts on the advertising signal, the result might be a leader-follower price system of the Stackelberg type (Dowrick, 1986),” the authors note, citing the earlier research. In that case, each company establishes its price “with foresight and certain expectations about how its competitor will price its product.”
The authors hypothesized about the “relationship between advertising factors and the patterns of pricing interaction among competing brands.” Testing the hypotheses involved empirical studies “using data on DTCA’s creative strategy, print-advertising DTCA expenditures, detailing expenditures, and prices on the supply side (and sales revenue on the aggregate demand side)” for brands of drugs in the following treatment categories: depression, osteoporosis, hyperlipidemia (high cholesterol) and erectile dysfunction.
Among the findings:
- “DTCA tends to be effective in stimulating drug-category sales in pharmaceutical markets, where leader-follower pricing behavior exists.
- Under certain conditions, an integrated advertising and pricing strategy can be profitable for all companies in a market. The strategy involves category-expanding advertising by a company, combined with a competitive pricing strategy.
- The prescription-drug brand that spends the most on consumer advertising should be the price leader.
- Advertising and pricing strategies complement each other: An effective advertising campaign is necessary for the pricing strategy to work, and a profitable leader-follower pricing system justifies the expenditure on consumer advertising.”