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

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  • Ernst R. Berndt
  • Zvi Griliches
  • Joshua G. Rosett

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.

Suggested Citation

  • Ernst R. Berndt & Zvi Griliches & Joshua G. Rosett, 1992. "Auditing the Producer Price Index: Micro Evidence From Prescription Pharmaceutical Preparations," NBER Working Papers 4009, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:4009
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    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.
    2. Ernst R. Berndt & Zvi Griliches, 1993. "Price Indexes for Microcomputers: An Exploratory Study," NBER Chapters,in: Price Measurements and Their Uses, pages 63-100 National Bureau of Economic Research, Inc.
    3. Hulten, Charles R, 1973. "Divisia Index Numbers," Econometrica, Econometric Society, vol. 41(6), pages 1017-1025, November.
    4. George J. Stigler & James K. Kindahl, 1970. "The Behavior of Industrial Prices," NBER Books, National Bureau of Economic Research, Inc, number stig70-1.
    5. W. Erwin Diewert, 1988. "The Early History of Price Index Research," NBER Working Papers 2713, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Kanavos, Panos G. & Vandoros, Sotiris, 2011. "Determinants of branded prescription medicine prices in OECD countries," Health Economics, Policy and Law, Cambridge University Press, vol. 6(03), pages 337-367, June.
    2. Kenneth Flamm, 1993. "Measurement of DRAM Prices: Technology and Market Structure," NBER Chapters,in: Price Measurements and Their Uses, pages 157-206 National Bureau of Economic Research, Inc.
    3. Joseph P. Newhouse, 2001. "Medical Care Price Indices: Problems and Opportunities / The Chung-Hua Lectures," NBER Working Papers 8168, National Bureau of Economic Research, Inc.
    4. Ernst R. Berndt & Iain M. Cockburn & Douglas L. Cocks & Arnold M. Epstein & Zvi Griliches, 1998. "Is Price Inflation Different for the Elderly? An Empirical Analysis of Prescription Drugs," NBER Chapters,in: Frontiers in Health Policy Research, Volume 1, pages 33-76 National Bureau of Economic Research, Inc.
    5. Abbott, Thomas III, 1995. "Price regulation in the pharmaceutical industry: Prescription or placebo?," Journal of Health Economics, Elsevier, vol. 14(5), pages 551-565, December.
    6. Sara Fisher Ellison & Catherine Wolfram, 2001. "Pharmaceutical Prices and Political Activity," NBER Working Papers 8482, National Bureau of Economic Research, Inc.
    7. Ferrara, Ida & Missios, Paul, 2012. "Pricing of drugs with heterogeneous health insurance coverage," Journal of Health Economics, Elsevier, vol. 31(2), pages 440-456.
    8. Andrew Ching, 2000. "Dynamic Equilibrium in the US Prescription Drug Market After Patent Expiration," Econometric Society World Congress 2000 Contributed Papers 1242, Econometric Society.
    9. Klette, Tor Jakob & Griliches, Zvi, 2000. "Empirical Patterns of Firm Growth and R&D Investment: A Quality Ladder Model Interpretation," Economic Journal, Royal Economic Society, vol. 110(463), pages 363-387, April.
    10. Iqbal Syed & Daniel Melser, 2008. "Prices over the Product Life Cycle: An Empirical Analysis," Discussion Papers 2008-25, School of Economics, The University of New South Wales.
    11. Patricia M. Danzon & Allison Percy, 1999. "The Effects of Price Regulation on Productivity in Pharmaceuticals," NBER Chapters,in: International and Interarea Comparisons of Income, Output, and Prices, pages 371-418 National Bureau of Economic Research, Inc.
    12. Perloff, Jeffrey M. & Suslow, Valerie Y. & Seguin, Paul J., 1995. "Higher Prices from Entry: Pricing of Brand-Name Drugs," Competition Policy Center, Working Paper Series qt75g4k1nt, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
    13. Ernst R. Berndt & David M. Cutler & Richard Frank & Zvi Griliches & Joseph P. Newhouse & Jack E. Triplett, 2001. "Price Indexes for Medical Care Goods and Services -- An Overview of Measurement Issues," NBER Chapters,in: Medical Care Output and Productivity, pages 141-200 National Bureau of Economic Research, Inc.
    14. 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.
    15. Daniel Melser & Iqbal A. Syed, 2013. "Prices over the Product Life Cycle: Implications for Quality-Adjustment and the Measurement of Inflation," Discussion Papers 2013-26, School of Economics, The University of New South Wales.
    16. 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.
    17. Joan-Ramon Borrell & Jayashree Watal, 2002. "Impact of Patents on Access to HIV/AIDS Drugs in Developing Countries," CID Working Papers 92, Center for International Development at Harvard University.
    18. Lambrelli, Dimitra & O'Donnell, Owen, 2011. "The impotence of price controls: Failed attempts to constrain pharmaceutical expenditures in Greece," Health Policy, Elsevier, vol. 101(2), pages 162-171, July.
    19. W. Erwin Diewert, 1995. "Axiomatic and Economic Approaches to Elementary Price Indexes," NBER Working Papers 5104, National Bureau of Economic Research, Inc.

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