NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Generics and New Goods in Pharmaceutical Price Indexes

Zvi Griliches, Iain Cockburn

NBER Working Paper No. 4272 (Also Reprint No. r1933)
Issued in February 1993
NBER Program(s):   PR

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%.

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Document Object Identifier (DOI): 10.3386/w4272

Published: American Economic Review, vol. 84 no. 5, 1994 pp 1213-1232. citation courtesy of

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