An Empirical Model of Drug Detailing: Dynamic Competition and Policy Implications

Management Science, forthcoming

Hongju Liu. Co-authors: Qiang Liu, Sachin Gupta, and Sriram Venkataraman

Although the pharmaceutical industry is mainly driven by innovation, it spends an enormous amount of money on marketing. Among various marketing vehicles, detailing – personal selling through representatives – accounts for the single largest expenditure. The vast amount of detailing spending in the pharmaceutical industry has drawn the attention of the public and of policy makers. As a result, the practice of detailing in the marketing of prescription drugs is undergoing significant changes. For instance, in September 2013, the Physician Payment Sunshine Act went into full effect. The accompanying transparency requirements have prompted physician practices and hospitals to severely restrict pharmaceutical sales representatives’ direct access to their physicians. Despite all the discussion in the popular press, scant scholarly research has investigated how these restrictions on physician access impact physician prescription behavior and competitive detailing to physicians.

To analyze the impact of these restrictions, the authors develop a novel structural model of how pharmaceutical firms compete dynamically to schedule detailing to physicians. According to their model estimates and predictions, restrictions on detailing would expand the outside option such as a non-drug treatment. Depending on the effectiveness of the outside option, this may help or hurt public health. Notably, restriction policies that lead to similarly reduced detailing levels may have very different profit consequences for firms. For example, certain access limits and licensure requirements on pharmaceutical sales representatives may drive up the cost of detailing. In such scenarios the industry profits tend to drop. However, policies that simply limit the frequency of detailing visits might have the unintended effect of softening competition between firms and increasing industry profits. Given that restricting detailing levels could actually increase industry profits, the industry may want to scrutinize the specific policy before it lobbies against it.

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