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Measuring Quality-Adjusted Inflation Rates for a Heterogeneous Oligopoly

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  • David Prentice

    ()
    (Department of Economics and Finance, La Trobe University)

  • Xiangkang Yin

    ()
    (Department of Economics and Finance, La Trobe University)

Abstract

Both the theory and practice of using hedonic regressions to quality adjust inflation estimates are implicitly developed for monopolistic competitive markets. We demonstrate conditions required for consistent OLS estimation of hedonic regression for an oligopoly. To reflect firm heterogeneity, we make two recommendations on empirical practice. The first is to use quantity weights in constructing the index rather than the unsatisfactory equal weighting system implicit in the standard pooled regression. Second, to test for instability across product type, as well as over time. Implementing these recommendations results in higher estimates of inflation, similar to official quality-adjusted inflation rate.

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Bibliographic Info

Paper provided by School of Economics, La Trobe University in its series Working Papers with number 2000.06.

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Length: 42 pages
Date of creation: Jun 2000
Date of revision:
Handle: RePEc:ltr:wpaper:2000.06

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Keywords: Quality Adjustment; Price Index; Automobile Industry; Oligopoly EDIRC Provider-Institution: RePEc:edi:smlatau;

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  1. Caplin, A. & Nalebuff, B., 1989. "Aggregation And Imperfect Competition: On The Existence Of Equilibrium," Discussion Papers 1989_30, Columbia University, Department of Economics.
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  19. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  20. David Prentice & Xiangkang Yin, 2004. "Constructing a Quality-Adjusted Price Index for a Heterogeneous Oligopoly," Manchester School, University of Manchester, vol. 72(4), pages 423-442, 07.
  21. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
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  23. David Prentice & Xiangkang Yin, 2000. "Measuring Quality-Adjusted Inflation Rates for a Heterogeneous Oligopoly," Working Papers 2000.06, School of Economics, La Trobe University.
  24. Cropper, Maureen L & Deck, Leland B & McConnell, Kenneth E, 1988. "On the Choice of Functional Form for Hedonic Price Functions," The Review of Economics and Statistics, MIT Press, vol. 70(4), pages 668-75, November.
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Cited by:
  1. David Prentice & Xiangkang Yin, 2004. "Constructing a Quality-Adjusted Price Index for a Heterogeneous Oligopoly," Manchester School, University of Manchester, vol. 72(4), pages 423-442, 07.
  2. Kremmer, M.L. & Prentice, D., 2005. "On the Double Imputation Hedonic Price Index," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 35(1-2), pages 103-112, March/Sep.

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