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Generics and New Goods in Pharmaceutical Price Indexes

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Author Info
Zvi Griliches
Iain Cockburn

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Abstract

We examine the issue of new goods and price indexes for the important and tractable case of generic and branded drugs. By treating generics as entirely distinct goods and "linking them in" to indexes with fixed weights, the standard price indexes fail to reflect the substantial welfare gains to those consumers who, like the FDA, regard generic and branded versions of a drug as being perfect substitutes. We discuss the treatment of heterogenous consumers in constructing aggregate price indexes, and then, using detailed data on wholesale prices of two anti-infective drugs, present calculations of various alternatives to the official indexes. These reflect both heterogeneity of tastes for brandedness, and also the empirically important phenomenon of diffusion of generic drugs into the market following patent expiration. We find very significant differences: for one of the drugs studied, the standard price index rose by 14% over the sample period, while our preferred alternative index fell by 48%.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4272.

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Date of creation: Jan 1995
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Handle: RePEc:nbr:nberwo:4272

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Find related papers by JEL classification:
D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology

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  15. 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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