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Calculating Hedonic Price Indices with Unobserved Product Attributes: An Application to the UK Car Market

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  • FRANCISCO REQUENA-SILVENTE
  • JAMES WALKER

Abstract

We show that hedonic price indices that omit model-specific unobservable product attributes are subject to considerable bias. We utilize a complete panel of new car versions marketed in the UK over 1971-98 which incorporates over 100 observable product characteristics, sales weighting to capture the distribution of purchases across models, and model-specific fixed effects to account for unobservable characteristics. We find that quality-adjusted prices obtained from hedonic regressions that do not account for unobservable characteristics exhibit a severe downward bias. We also show that quality-adjusted prices exhibit distinct sub-market differences having increased in 'mass production' segments and decreased in 'specialized niches'. Copyright (c) The London School of Economics and Political Science 2006.

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Bibliographic Info

Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 73 (2006)
Issue (Month): 291 (08)
Pages: 509-532

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Handle: RePEc:bla:econom:v:73:y:2006:i:291:p:509-532

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Cited by:
  1. Knittel, Christopher R., 2009. "Automobiles on Steroids: Product Attribute Trade-O�s and Technological Progress in the Automobile Sector," Institute of Transportation Studies, Working Paper Series qt2nt1r1x1, Institute of Transportation Studies, UC Davis.
  2. Xosé-Luís Varela-Irimia, 2011. "Age effects, unobserved characteristics and hedonic price indexes: The Spanish car market in the 1990?s," Working Papers XREAP2011-11, Xarxa de Referència en Economia Aplicada (XREAP), revised Aug 2011.
  3. Ana Isabel Guerra Hernández, 2007. "Effects of Competition over Quality-Adjusted Price Indexes: An Application to the Spanish Automobile Market," Working Papers wpdea0707, Department of Applied Economics at Universitat Autonoma of Barcelona.
  4. Naoki Watanabe & Ryo Nakajima & Takanori Ida, 2010. "Quality-Adjusted Prices of Japanese Mobile Phone Handsets and Carriers’ Strategies," Review of Industrial Organization, Springer, vol. 36(4), pages 391-412, June.

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