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

Abstract

This paper examines how over-the-counter drug labels influence consumer perceptions of efficacy, distort decision-making, and shape equilibrium outcomes under counterfactual regulatory scenarios. It addresses a key identification challenge—the unobservability of perceived efficacy under different information structures—by conducting a randomized controlled trial and integrating its findings into a structural model. Using data from a control group and three treatment arms, I construct product-level measures of perceived efficacy beliefs based on pairwise product comparisons. Leveraging control group data supplemented with NielsenIQ data, I estimate a structural demand model that isolates the role of efficacy beliefs while accounting for heterogeneous preferences. I then incorporate updated beliefs to assess equilibrium effects under each information treatment. In equilibrium, the most effective intervention—emphasizing equivalent efficacy—increases substitution between biologically equivalent products by 26%, reduces consumer spending by 12%, but also introduces second-degree price discrimination driven by symptom-label preferences.