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Prices, Product Differentiation And Quality Measurement: A Comparison Between Hedonic And Matched Model Methods

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  • Gian Maria Tomat

    ()
    (Bank of Italy, Research Department, Rome Branch)

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    Abstract

    The paper provides an analysis of the problems of construction of quality-adjusted price indexes within the framework of the theory of product differentiation. In the general case of price-making behaviour on the part of firms, hedonic regressions are defined on the basis of reduced forms of the equation relating equilibrium prices to product characteristics. The paper considers the reduced form given by the marginal cost function and shows that the Laspeyres hedonic price index provides a lower bound to the quality-adjusted rate of price change while the Paasche hedonic price index provides an upper bound to the quality-adjusted rate of price change. The properties of hedonic price indexes are compared with those of matched model indexes. The theory is applied to the study of personal computer prices in Italy during the 1995-2000 period.

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    Bibliographic Info

    Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 547.

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    Date of creation: Feb 2005
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    Handle: RePEc:bdi:wptemi:td_547_05

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    Keywords: discrete choice; price indexes; product quality; personal computer;

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