GENERICS AND NEW GOODS IN PHARMACEUTICAL PRICE INDEXES

When the patent on a drug expires, there are substantial welfare gains to those consumers who, like the Food and Drug Administration, regard branded and generic versions as perfect substitutes. Standard price i ndexes fail to reflect this, since they treat generics as distinct new goods and ''link them in'' with fixed weights. Alternative calculatio ns are presented, using detailed data on the wholesale prices of two a nti-infective drugs. Significant differences are found: for one of the drugs studied the standard price index rose by 14 percent over 45 mon ths following patent expiration, while our preferred alternative index fell by 48 percent.