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Auditing the Producer Price Index: Micro Evidence From Prescription Pharmaceutical Preparations

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Author Info
Ernst R. Berndt
Zvi Griliches
Joshua G. Rosett

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Abstract

In this paper we focus on a mystery we uncovered while undertaking a detailed audit of the US Bureau of Labor Statistics producer price index (PPl). We summarize our puzzle as follows. From January 1984 through December 1989.the BLS price Index for SIC 28341 (prescription pharmaceutical preparations) grew at an annual rate of 9.09%. For purposes of comparison, we have obtained monthly price and quantity sales data on all prescription pharmaceutical preparation products sold by four major US pharmaceutical manufacturers, accounting for about 24% of total industry domestic sales in 1989. Using Laspeyres price index construction procedures on these data that mimic BLS methods, we find that over the same time period. the four-company price index increased at only 6.68% per year. Finally. when we employ a Divisia price index procedure with smoothed weights that incorporates new goods immediately, the aggregate price index for these four firms grows at a rate of only 6.03% per year. Why is it that the official BLS price index grows approximately 50% more rapidly (9.09% vs. 6.03%)than the Divisia price index? That mystery is the focal point of our paper.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4009.

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Date of creation: Mar 1992
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Handle: RePEc:nbr:nberwo:4009

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Ernst R. Berndt & Zvi Griliches & Joshua G. Rosett, 1990. "On the Accuracy of Producer Price Indexes for Pharmaceutical Preparations: An Audit Based on Detailed Firm-Specific Data," NBER Working Papers 3490, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Diewert, Erwin, 2007. "Index Numbers," UBC Departmental Archives diewert-07-01-03-08-17-23, UBC Department of Economics, revised 31 Jan 2007. [Downloadable!]
  3. Hulten, Charles R, 1973. "Divisia Index Numbers," Econometrica, Econometric Society, vol. 41(6), pages 1017-25, November. [Downloadable!] (restricted)
  4. W. Erwin Diewert, 1988. "The Early History of Price Index Research," NBER Working Papers 2713, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Ernst R. Berndt & Zvi Griliches, 1990. "Price Indexes for Microcomputers: An Exploratory Study," NBER Working Papers 3378, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  1. Ernst R. Berndt & David M. Cutler & Richard G. Frank & Zvi Griliches & Joseph P. Newhouse, 1998. "Price Indexes for Medical Care Goods and Services: An Overview of Measurement Issues," NBER Working Papers 6817, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Zvi Griliches & Tor Jakob Klette, 1999. "Empirical patterns of firm growth and R&D investment: a quality ladder model interpretation," IFS Working Papers W99/25, Institute for Fiscal Studies. [Downloadable!]
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  3. Perloff, Jeffrey M. & Suslow, Valerie Y. & Seguin, Paul J., 1996. "Higher prices from entry : pricing of brand-name drugs," CUDARE Working Paper Series 778, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy. [Downloadable!]
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  4. Ernst R. Berndt & Iain M. Cockburn & Douglas L. Cocks & Arnold Epstein & Zvi Griliches, 1997. "Is Price Inflation Different for the Elderly? An Empirical Analysis of Prescription Drugs," NBER Working Papers 6182, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Sara Fisher Ellison & Catherine Wolfram, 2001. "Pharmaceutical Prices and Political Activity," NBER Working Papers 8482, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Andrew Ching, 2000. "Dynamic Equilibrium in the US Prescription Drug Market After Patent Expiration," Econometric Society World Congress 2000 Contributed Papers 1242, Econometric Society. [Downloadable!]
  7. Jack E. Triplett, 1997. "Measuring consumption: the post-1973 slowdown and the research issues," Review, Federal Reserve Bank of St. Louis, issue May, pages 9-42. [Downloadable!]
  8. W. Erwin Diewert, 1995. "Axiomatic and Economic Approaches to Elementary Price Indexes," NBER Working Papers 5104, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Rexford Santerre & John A. Vernon, 2005. "Assessing Consumer Gains from a Drug Price Control Policy in the U.S," NBER Working Papers 11139, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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