Wednesday, February 14, 2007

Costly Advertising Can Make Pharmaceuticals Cheaper?

Stuart K. Hayashi

Tali, I found an article I thought was interesting, and I wanted to ask you about your reaction.

A common smear against pharmaceutical companies is that they should be faulted for charging higher prices for their drugs on account of the millions of dollars they spend on sappy TV commercials.

(One TV commercial I find particularly annoying in its phoniness is the one where there is this bunch of young women at this party and one of them gives a ridiculously technical lecture about how to take a certain type of birth control pill. To explain why this woman is being so technical, the commercial has her say, "I didn't go to medical school for nothin'!" That was really contrived, because she doesn't talk like a doctor at all; she sounds more like a corporate lawyer . . . most likely because a lawyer had to oversee how her lines were written.)

Anyhow, writer Wayne Dunns explains that a pharmaceutical firm might actually be able to lower the prices of its products by spending millions on advertising:

The expense of advertising actually lowers the product's cost, in the long run, just as the expense of electricity and machines used in the product's manufacture results in the finished good being more, not less, affordable. [ . . . ]

Certainly the cost of advertising drugs is passed on to the drugs' consumers, just as the cost of advertising cars is passed on to the cars' buyers. But the purpose of advertising is to expand the customer base by informing more people of the product's existence and virtues. The more consumers a company attracts to its product, the more it sells. The more it sells, the less money it must make per unit sold in order to be profitable. Advertising generally attracts more customers, which might allow the company to charge less in anticipation of making more money through increased volume.

I hadn't thought of that before. What do you think?

Edit on Sunday, April 1, 2007: When I first published this post, I forgot to include a link to Wayne Dunn's article. --S.H.


At 11:41 PM , Blogger Talifaitasi Satele said...

i'm surprised you haven't thought of that before my friend. a lot of people like to analyze whether a particular cost incurred by a person is a waste or not. it's quite funny that one could speculate how another person could better spend their time and money. many look at advertising and say "waste". it only adds to the cost, they say. i used to think that way. the way i think now is that no one spends their money just to throw it away and continue to do it. there's a benefit to advertising for the person doing the advertising, as your post explains. but you can't make the same argument for an entity (government) that spends someone else's money for something. there's that disconnect that's undeniable. if you're spending money that's not yours, you care less if there's a benefit to you or not. people say, "oh, we'll pass laws to ensure that money is spent efficiently!" great, private sector people say they'll pass company regs and rules to do the same thing. but rules are most certainly meant to be broken. the real regulator in freedom is that you are free to go bankrupt. Losses protect society from inefficiency and stupidity. so if you like advertising but it may cause you to close down or it doesn't benefit you, then you forgo the advertising. but advertising, like your post says, helps spread the costs to lower prices to increase your consumer base to raise your profits. boom, baam, and the world goes round.


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