Generics and New Goods in Pharmaceutical Price Indexes
Zvi Griliches and
Iain 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%.