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adjusted price index remains decreasing towards the end of our period of analysis. Contrasting with the previous two models, the vertical model shows that innova- tion results in moderate, but positive price increases. The parameter estimates for this model and the distribution of the price coefficient are shown in Table 4 and Figure 4 respectively.

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Conclusion

This paper provides evidence to support the idea that new medical technology, in particular colon cancer drugs, provide welfare increases that justify their cost. We calculate a naive price index that does not adjust for improving attributes and compare it with a hedonic price index and two quality-adjusted price indices. The conclusions about the evolution of prices of new pharmaceutical developments dif- fers substantially between the naive price index and the three methods that take into account changing product attributes. While the naive price index shows a dramatic increase in prices over the 13-year period we study, the hedonic price and the quality-adjusted price index show slight decreases, and slight increase in the case of the vertical model. The levels of the hedonic and quality-adjusted price indices suggest that pharmaceutical companies are able to capture most of the welfare they generate with the launches of new and better products. Ongo- ing research will refine these estimates using frontier discrete choice methods for demand estimation.

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