Advertising has never been a popular thing amongst pundits. It is depicted as an attempt to manipulate consumers into desiring things they do not (or should not) need. Others depict it – as is often seen in series like Mad Men which was popular a decade ago – “selling dreams” to consumers by perpetuating unrealistic standards of success and well-being tied to a product or a service.
These criticisms have existed since the late nineteenth century, remaining largely unchanged except for the language and imagery used in public discourse. The most recent reiteration is President-elect Donald Trump’s prospective nominee for secretary of Health and Human Services, Robert F. Kennedy Jr (RFK Jr.) who has been on the record as advocating for banning pharmaceutical companies from advertising on television. The reasoning is exactly like those late nineteenth century criticisms – the adverts are meant to prop up, by appeals to emotion rather than reason, demand for drugs that are not needed or have little added value.
Just as the criticisms are merely a rebranding of the same nineteenth-century argument, the responses that economists have marshalled remain the same. Advertising helps consumers by providing information and by creating competition between firms. It also encourages firms to invest in product quality by creating brands that consumers value because of the product quality. Advertising quality is a way to create further competition. More importantly, and very often, the relationship is reversed — innovating firms try to meet the difficult features of consumer demand and they generate new products. The advertising follows afterward to inform consumers. It allows them to inform the public of their innovation. If advertising is unavailable, innovation becomes unappealing in the first place and never happens.
All of this is exactly what the much-maligned advertising by pharmaceutical companies actually does.
First, when direct advertising was allowed in the late 1990s, it had the effect of creating greater product competition. Drugs that were close substitutes for each other began exhibiting greater sign of price competition rather than by competition via brand loyalty. By weakening brand loyalty, it also allowed generic medication (even those that were less advertised) to break through.
It also offered valuable information to consumers by pointing to treatment options that consumers were previously unaware of and assisted them in identifying their symptoms and seeking medical care. One study found that direct to consumers advertising stimulated new diagnosis in 25 percent of patients who came after viewing ads. At the same time, physicians were also able to inform in further details regarding whether a treatment was truly needed. By levelling the playing field between patients and physicians in terms of knowledge, patients are better able to identify trade-offs that affect their well-being. This helps achieve better health outcomes.
For example, one study found that advertising to consumers directly for relevant drugs increased the likelihood of attaining cholesterol management goals within certain groups of patients. A more recent study focusing on advertising for antidepressants found that such advertising led to an increase in prescriptions and subsequently, lower rates of workplace absenteeism.
Second, the research and development process for new drugs is lengthy, costly and risky. Only a tiny fraction of all molecules that are researched end up being marketed. From that fraction, we must subtract those that fail to cover their development and regulatory approval costs (in excess of 10 years and more than $1 billion per drug). Given these features, pharmaceutical companies must promote drugs to generate the revenues needed to cover costs and risks. If one cuts the room for advertising, one cuts the potential sales revenues. And by cutting the potential sales revenues, you dampen the incentive to innovate in the first place. In other words, boosting revenues via advertising is vital as it motivates continued investment in R&D for new drug development.
Slowing down the rate of research and development into new drugs is something that is immensely damaging to improvement in living standards. For example, one study found that 73 percent of the increase in life expectancy at birth after 1990 across high-income countries could be explained by the introduction of new drugs. Another study found that for the earlier period from 1986 to 2000, new drugs explained 46 percent of the improvements in life expectancy at birth. Additionally, new drugs indirectly reduce healthcare costs by substituting drug-based treatments for in-facility care, such as treatments requiring a hospital stay or visit, thereby helping to mitigate the effects of rising healthcare demand.
Bans of advertisements could thus hurt patients now (by reducing their information) and patients later (by reducing innovation). It is easy to fall prey to populist contempt for “Big Pharma” but this is a bad policy that could hurt many.