Information Distortion in Label Design in Over-the-Counter Drug Market

Abstract

This paper integrates a randomized controlled trial and structural analysis to investigate how misconceptions about drug efficacy distort consumer decisions in the over-the-counter market and how clearer information can improve consumer welfare. A key challenge is that beliefs about efficacy are unobservable, which complicates the assessment of consumers’ initial perceptions and responses to new information. To address this, I gathered pairwise product comparisons from a control group and three treatment arms to develop product-level measures of efficacy beliefs. The first two treatments modify product labels to indicate whether drugs share the same active components or offer equivalent efficacy, while the third gives a brochure to consumers, prior to their purchase, that outlines both aspects. To document change in consumer choices in each information treatment, I first use control group data, supported by NielsenIQ data, to estimate a structural demand model that separately identifies the weight consumers place on beliefs about efficacy while accounting for heterogeneous preferences. I then incorporate the revised beliefs to document demand and supply responses to the information treatments. The results show that all treatments reduce information distortions and enhance welfare by increasing substitution between products with the same and different active components. The most effective treatment — emphasizing equivalent efficacy —increases substitution elasticities by 22% on average, saves the average consumer $1.09, and generates a welfare gain of $1.20 per consumer. It results in $6.5 million annual savings across the 50 largest markets. However, this approach also leads to second-degree price discrimination based on consumers’ preferences for symptom labels, highlighting the need for social planner to make informed policy decisions.