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Re-Assessing the U.S. Quality Adjustment to Computer Prices: The Role of Durability and Changing Software

In: Price Index Concepts and Measurement

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  • Robert C. Feenstra
  • Christopher R. Knittel

Abstract

In the second-half of the 1990s, the positive impact of information technology on productivity growth for the United States became apparent. The measurement of this productivity improvement depends on hedonic procedures adopted by the Bureau of Labor Statistics (BLS) and Bureau of Economic Analysis (BEA). In this paper we suggest a new reason why conventional hedonic methods may overstate the price decline of personal computers. We model computers as a durable good and suppose that software changes over time, which influences the efficiency of a computer. Anticipating future increases in software, purchasers may “overbuy” characteristics, in the sense that the purchased bundle of characteristics is not fully utilized in the first months or year that a computer is owned. In this case, we argue that hedonic procedures do not provide valid bounds on the true price of computer services at the time the machine is purchased with the concurrent level of software. To assess these theoretical results we estimate the model and find that before 2000 the hedonic price index constructed with BLS methods overstates the fall in computer prices. After 2000, however, the BLS hedonic index falls more slowly, reflecting the reduced marginal cost of acquiring (and therefore marginal benefit to users) of characteristics such as RAM, hard disk space or speed.

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This chapter was published in:

  • W. Erwin Diewert & John S. Greenlees & Charles R. Hulten, 2009. "Price Index Concepts and Measurement," NBER Books, National Bureau of Economic Research, Inc, number diew08-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 5072.

    Handle: RePEc:nbr:nberch:5072

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Feenstra, R.C., 1995. "Exact Hedonic Price Indexes," Papers 95-11, California Davis - Institute of Governmental Affairs.
    2. Ariel Pakes, 2003. "A Reconsideration of Hedonic Price Indexes with an Application to PC's," American Economic Review, American Economic Association, vol. 93(5), pages 1578-1596, December.
    3. Stephen D. Oliner & Daniel E. Sichel, 2000. "The resurgence of growth in the late 1990s: is information technology the story?," Finance and Economics Discussion Series 2000-20, Board of Governors of the Federal Reserve System (U.S.).
    4. Robert C. Feenstra & Matthew D. Shapiro, 2003. "Scanner Data and Price Indexes," NBER Books, National Bureau of Economic Research, Inc, number feen03-1.
    5. Glenn Ellison & Drew Fudenberg, 2000. "The Neo-Luddite's Lament: Excessive Upgrades in the Software Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 253-272, Summer.
    6. Benkard, C. Lanier & Bajari, Patrick, 2003. "Hedonic Price Indexes with Unobserved Product Characteristics, and Application to PC's," Research Papers 1841, Stanford University, Graduate School of Business.
    7. W. Erwin Diewert, 1980. "Aggregation Problems in the Measurement of Capital," NBER Chapters, in: The Measurement of Capital, pages 433-538 National Bureau of Economic Research, Inc.
    8. Alan G. White & Jaison R. Abel & Ernst R. Berndt & Cory W. Monroe, 2010. "Hedonic Price Indexes for Personal Computer Operating Systems and Produtivity Suites," NBER Chapters, in: Contributions in Memory of Zvi Griliches, pages 787-807 National Bureau of Economic Research, Inc.
    9. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
    10. C. Lanier Benkard & Patrick Bajari, 2003. "Hedonic Price Indexes with Unobserved Product Characteristics, and Application to PC's," NBER Working Papers 9980, National Bureau of Economic Research, Inc.
    11. Christopher R. Knittel & Victor Stango, 2004. "Compatibility and Pricing with Indirect Network Effects: Evidence from ATMs," NBER Working Papers 10774, National Bureau of Economic Research, Inc.
    12. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    13. W. Erwin Diewert, 2003. "Hedonic Regressions. A Consumer Theory Approach," NBER Chapters, in: Scanner Data and Price Indexes, pages 317-348 National Bureau of Economic Research, Inc.
    14. Stephen D. Oliner, 1993. "Constant-Quality Price Change , Depreciation, and Retirement of Mainframe Computers," NBER Chapters, in: Price Measurements and Their Uses, pages 19-62 National Bureau of Economic Research, Inc.
    15. G. Christian Ehemann & Brent R. Moulton, 2001. "Balancing the GDP Account," BEA Papers 0014, Bureau of Economic Analysis.
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    Cited by:
    1. Bloom, Nicholas & Sadun, Raffaella & Van Reenen, John, 2007. "Americans Do I.T. Better: US Multinationals and the Productivity Miracle," CEPR Discussion Papers 6291, C.E.P.R. Discussion Papers.
    2. Susan N. Houseman & Timothy J. Bartik & Timothy J. Sturgeon, 2014. "Measuring Manufacturing: How the Computer and Semiconductor Industries Affect the Numbers and Perceptions," Upjohn Working Papers and Journal Articles 14-209, W.E. Upjohn Institute for Employment Research.

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