Working Paper: CEPR ID: DP17658
Authors: Pierre Dubois; Gosia Majewska
Abstract: In many industries, market structure determines how firms not only compete in terms of prices but also utilize promotional activities. We study how price and advertising strategies change when firms merge in pharmaceutical markets in the US. We show that across all drug markets, although mergers indeed increase prices, advertising spending also decreases. Merger simulations not accounting for advertising reductions may thus obtain biased price effects. Considering the merger effects of two large pharmaceutical companies on an antimicrobial drug market, we estimate a structural model of supply and demand and simulate the merger effect. We find that the merger effect on prices is smaller given the reduction in the amount of advertising. We also provide a simple method through which to evaluate long-term welfare effects using some known value of the sensitivity of innovation to profits
Keywords: innovation; welfare; advertising; drugs; merger
JEL Codes: I10; L22; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mergers (G34) | prices (P22) |
| mergers (G34) | advertising spending (M37) |
| advertising spending (M37) | prices (P22) |
| mergers (G34) | consumer welfare (D69) |
| advertising spending (M37) | demand (R22) |
| demand (R22) | prices (P22) |
| mergers (G34) | advertising strategies (M37) |