Mitigating agency problems by advertising, with special reference to managed health care

An agency conflict arises when consumers rely on middlemen for product reco mmendations. Although consumers want the middlemen to recommend the most su itable product, the middlemen may earn a higher profit if the consumer buys another product. One setting where this conflict arises is the managed hea lth care market. Managed health care providers have an incentive to spend t oo little on prescription drugs. We investigate whether pharmaceutical manu facturers can use advertising to mitigate this agency conflict. Although ad vertising may induce health care providers to offer socially efficient medi cations, drug companies may not choose the socially efficient level of adve rtising. It will also pay for drug companies to inform consumers if they wi ll not benefit from some drug, as this will increase the price that those w ho will benefit will be willing to pay.