MANAGEMENT SLANT

  • Direct-to-consumer advertising 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 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.

INTRODUCTION

The interaction between advertising and pricing long has been recognized with studies of the effect of nonprice promotions on price sensitivity (Narayanan, Desiraju, and Chintagunta, 2004; Rizzo, 1999). Competitive pricing strategies are especially important when there is an oligopoly with a few big players competing for share of a growing market and when market conditions allow for high prices and profits because demand is relatively inelastic.