Generics and New Goods in Pharmaceutical Price Indexes

38 Pages Posted: 28 May 2004 Last revised: 29 Jun 2012

See all articles by Zvi Griliches

Zvi Griliches

(Deceased)

Iain M. Cockburn

Boston University Questrom School of Business; National Bureau of Economic Research (NBER)

Date Written: February 1993

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%.

Suggested Citation

Griliches, Zvi and Cockburn, Iain M., Generics and New Goods in Pharmaceutical Price Indexes (February 1993). NBER Working Paper No. w4272, Available at SSRN: https://ssrn.com/abstract=236570

Zvi Griliches

(Deceased)

Iain M. Cockburn (Contact Author)

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617-353-3775 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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