Demand systems and the true subindex of the cost of living for pharmaceuticals
This paper investigates the demand for prescription pharmaceuticals at the retail level. We use complete demand systems to investigate elasticity for major classes of pharmaceuticals. We estimate both a regular and an inverse demand system using a differential version of the Rotterdam model. We find that both systems yield negative, and statistically significant own-price elasticities. The results indicate that pharmaceutical demand curves are not perfectly inelastic as some industry commentators suggest. We use the results of the complete demand system and a variant of a formula developed by Balk (1990) to derive a cost-of-living subindex for retail pharmaceuticals. We find that retail pharmaceutical prices using our index rise faster than wholesale prices, calculated either by the BLS or by the methods developed by Berndt et al.(1993).
Volume (Year): 29 (1997)
Issue (Month): 9 ()
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- Griliches, Zvi & Cockburn, Iain, 1994.
"Generics and New Goods in Pharmaceutical Price Indexes,"
American Economic Review,
American Economic Association, vol. 84(5), pages 1213-32, December.
- Zvi Griliches & Iain Cockburn, 1993. "Generics and New Goods in Pharmaceutical Price Indexes," NBER Working Papers 4272, National Bureau of Economic Research, Inc.
- Griliches, Z. & Cockborn, I., 1993. "Generics and New Goods in Pharmaceutical Price Indexes," Harvard Institute of Economic Research Working Papers 1664, Harvard - Institute of Economic Research.
- Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
- Eales, James S. & Unnevehr, Laurian J., 1994. "The inverse almost ideal demand system," European Economic Review, Elsevier, vol. 38(1), pages 101-115, January.
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