Working Paper: NBER ID: w4272
Authors: Zvi Griliches; Lain Cockburn
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%.
Keywords: pharmaceuticals; price indexes; generic drugs
JEL Codes: D40; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of generic drugs (L65) | price declines (E30) |
| introduction of generic drugs (L65) | consumer welfare gains (D61) |
| heterogeneous consumers (D11) | market dynamics (D49) |
| treatment of generic drugs as distinct commodities (L49) | bias in price indexes (C43) |