This paper examines the entry implications of physician advertising. Evidence suggests that advertising inhibits entry into this market. Nevertheless. experienced physicians (incumbents), to whom advertising would offer the greatest financial benefit, in fact advertise less--a paradox that may be explained by nonfinancial concerns, such as unwillingness to break well-internalized professional norms against advertising. Physician advertising has risen sharply in recent years, and it appears that this trend will continue. If incumbents increasingly resort to advertising, there could be a substantial redistribution of income from less-well-established physicians to better-established ones.

We examine the effects of reference income on the behavior of young male physicians. Using a unique panel of data, we relate physicians' reference and actual incomes to their subsequent income growth. Reference income has a strong positive effect on subsequent income for physicians who are below their reference points, but not for physicians who are at or above their reference points. Loss aversion, which posits a kink in utility at the reference point, explains this puzzling pattern. Physicians respond strongly to shortfalls from the reference point—they take unappealing actions to boost earnings—because the marginal utility of income is steep in that range. Competing prominent theories, tested here, fail to explain these relationships.

This paper examines the entry implications of physician advertising. Evidence suggests that advertising inhibits entry into this market. Nevertheless. experienced physicians (incumbents), to whom advertising would offer the greatest financial benefit, in fact advertise less--a paradox that may be explained by nonfinancial concerns, such as unwillingness to break well-internalized professional norms against advertising. Physician advertising has risen sharply in recent years, and it appears that this trend will continue. If incumbents increasingly resort to advertising, there could be a substantial redistribution of income from less-well-established physicians to better-established ones.