First, let me point out that every dollar spent on advertising is spent with the understanding that it will bring in more than one dollar in profit. This is a cold hard economic fact. You dont spend more money advertising than you recoup from increased profits.

Second, pricing of a product. You have two main factors that go into a product’s price: the overhead (that which you would spend regardless of how many you sell – ex: R&D) and marginal cost (materials, shipping, etc.). Marginal cost is going to be consistent in pricing, while the overhead is reflected in quantity of the product you expect to sell. The more product sold, the more overhead cost can be distributed. Fewer products sold = higher overhead (dollar amount) incorporated into the cost of each unit.

Third, advertising increases the sales base. More consumers reached leads to more units sold. Pretty much expected, no explanation needed.

So, if advertising widens the sales base and more units are sold, the inherent overhead cost can be spread over more consumers, effectively lowering the ‘overhead factor’ that is added into each unit. Depending on the absolute dollar amounts for overhead versus advertising, this could lead to anywhere between a decrease in price to a slight increase…most likely the former however.

I’ll throw an example in. None of these numbers are real, just used in the effort for simple math. Lets say the overhead cost for a drug is $500, and per unit is $1. Without advertising, a company expects to sell 100 units. They price the drug for zero profit, figuring anything above their target will result in profits. The price per unit is $6 (500 + 1(100) = 600, 600/(100 units) = 6$/unit)

Now, lets say the company spends $100 on advertising and expects to reach an additional 500 consumers. Now we’re looking at 600 consumers, and the break-even price is down to $2 (500 + 100 + 1(600) = 1200, 1200/(600) = $2/unit).

This is an extremely simplified model. There are many other factors that influence drug pricing, advertising, profits, etc. But I just wanted to use it to point out that advertising does not force prices up exorbitant amounts.

If anybody can dig up some statistics I’d really be interested in seeing a real-life scenario. I have a feeling though that it is more complicated than a non-economist such as myself could understand.

**It should also be noted (I didn’t point it out earlier) that overhead includes recouping cost for drugs which do not come to market, fail to turn profit, etc. The WSJ had a piece pointing out that only 1 in 5000 compounds make it to market, and then only 5 of the last 45 (not sure on that stat) drugs on market actually turned a large profit. Anyway, in my rambling I’m just pointing out that there is much more to recoup than the $800M pricetag for just that one drug.