Generics and New Goods in Pharmaceutical Price Indexes
When the patent on a drug expires, there are substantial welfare gains to those consumers who, like the Food and Drug Administration, regard branded and generic versions as perfect substitutes. Standard price indexes fail to reflect this, since they treat generics as distinct new goods and 'link them in' with fixed weights. Alternative calculations are presented using detailed data on the wholesale prices of two anti-infective drugs. Significant differences are found: for one of the drugs studied, the standard price index rose by 14 percent over forty-five months following patent expiration, while the authors' preferred alternative index fell by 48 percent. Copyright 1994 by American Economic Association.
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