Chesnes, Matthew and Dai, Weijia and Jin, Ginger Zhe, Banning Foreign Pharmacies from Sponsored Search: The Online Consumer Response (April 16, 2014). Federal Trade Commission Working Paper No. 321. Available at SSRN: http://ssrn.com/abstract=2428990

“Increased competition from the Internet has raised a concern of product quality for online prescription drugs. The Food and Drug Administration (FDA) prohibits the importation of unapproved drugs into the US and the National Association of Boards of Pharmacy (NABP) emphasizes their illegality and cites examples of unsafe drugs from rogue pharmacies. An investigation by the Department of Justice (DOJ) revealed that Google was allowing unapproved Canadian pharmacies to advertise on their search engine and target US consumers. Because of heightened concern to protect consumers, Google agreed to ban non-NABP-certified pharmacies from their sponsored search listings in February 2010 and settled with the DOJ in August 2011. We study how the ban on non-NABP-certified pharmacies from sponsored search listings affects consumer search on the Internet. Using click-through data from comScore, we find that non-NABP-certified pharmacies receive fewer clicks after the ban, and this effect is heterogeneous. In particular, pharmacies not certified by the NABP, but certified by other sources (other-certified sites), experience a reduction in total clicks, and some of their lost paid clicks are replaced by organic clicks. These effects do not change significantly after the DOJ settlement. In contrast, pharmacies not certified by any of the four major certification agencies suffer a greater reduction in both paid and organic clicks, and the reduction was exacerbated after the DOJ settlement. These results suggest that the ban has increased the search cost for other-certified sites, but at least some consumers overcome the search cost by switching from paid to organic links. In addition to search cost, the ban may have increased concerns for uncertified sites and discouraged consumers from reaching them via both paid and organic links.”