Mergers and Advertising in the Pharmaceutical Industry

Abstract

In many industries, the market structure determines the level of both price competition and 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 do indeed increase prices, advertising spending decreases after a merger. Merger simulations that do not account for advertising reductions may thus lead to biased price effects. Considering a merger of two large pharmaceutical companies in an antimicrobial drug market, we estimate a structural model of supply and demand and simulate the merger effect under different magnitudes of advertising changes. We find that the merger effect on prices is lower when accounting for advertising decreases than when ignoring them. We also provide welfare evaluations either using static consumer surplus or accounting for the dynamic consumer surplus effect of innovation that larger industry profit incentivizes.

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Reference

Pierre Dubois, and Gosia Majewska, “Mergers and Advertising in the Pharmaceutical Industry”, TSE Working Paper, n. 22-1380, October 2022, revised February 2025.