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Valuation of New Goods under Perfect and Imperfect Competition

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Author Info
Jerry A. Hausman
Abstract

The Consumer Price Index (CPI) attempts to answer the question of how much more (or less) income does a consumer require to be as well off in period 1 as in period 0 given changes in prices, changes in the quality of goods, and the introduction of new goods (or the disappearance of existing goods). In this paper I explain the theory of cost-of-living indices and demonstrate how new goods should be included using the classical theory of Hicks and Rothbarth. The correct price to use for the good in the pre-intro- duction period is a `virtual' price which sets demand to zero. Estimation of this virtual price requires estimation of a demand function which in turn provides the expenditure function which allows exact calucation of the cost of living index. The data requirements and need to specify and estimate a demand function for a new brand among many existing brands requires extensive data and some new econometric methods which may have proven obstacles to the inclusion of new goods in the CPI up to this point. As an example I use the introduction of a new cereal brand by General Mills in 1989-Apple Cinnamon Cheerios. I find the virtual price is about 2 times the actual price of Apple Cinnamon Cheerios and that increase in consumer surplus is substantial. Based on some simplifying approximations, I find that CPI may be overstated for cereal by about 25% because of its neglect of the effect of new brands. When I take imperfect competition into account I find that the increase in consumer welfare is only 85% as high with perfect competition so CPI for cereal would still be 20% too high

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4970.

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Date of creation: Dec 1994
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Publication status: published as The Economics of New Goods, Timothy F. Bresnahan and Robert J. Gordon, eds. , pp. 209, (Chicago: University of Chicago Press, 1997).
Handle: RePEc:nbr:nberwo:4970

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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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.:

  1. Breusch, Trevor S & Mizon, Grayham E & Schmidt, Peter, 1989. "Efficient Estimation Using Panel Data," Econometrica, Econometric Society, vol. 57(3), pages 695-700, May. [Downloadable!] (restricted)
  2. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-77, March. [Downloadable!] (restricted)
  3. Diewert, W.E., 1992. "Essays in Index Number theory : An Overview of Volume 1," UBC Departmental Archives 92-31, UBC Department of Economics.
  4. Hausman, Jerry A., 1980. "The effect of wages, taxes, and fixed costs on women's labor force participation," Journal of Public Economics, Elsevier, vol. 14(2), pages 161-194, October. [Downloadable!] (restricted)
  5. Burtless, Gary & Hausman, Jerry A, 1978. "The Effect of Taxation on Labor Supply: Evaluating the Gary Negative Income Tax Experiments," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1103-30, December. [Downloadable!] (restricted)
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  6. Kenneth L. Judd, 1985. "Credible Spatial Preemption," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 153-166, Summer. [Downloadable!] (restricted)
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  7. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November. [Downloadable!] (restricted)
  8. Hausman, Jerry A, 1981. "Exact Consumer's Surplus and Deadweight Loss," American Economic Review, American Economic Association, vol. 71(4), pages 662-76, September. [Downloadable!] (restricted)
  9. Hausman, Jerry A. & Taylor, William E., 1981. "Panel data and unobservable individual effects," Journal of Econometrics, Elsevier, vol. 16(1), pages 155-155, May. [Downloadable!] (restricted)
  10. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
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  11. Hausman, Jerry A & Taylor, William E, 1981. "Panel Data and Unobservable Individual Effects," Econometrica, Econometric Society, vol. 49(6), pages 1377-98, November. [Downloadable!] (restricted)
  12. Neary, J. P. & Roberts, K. W. S., 1980. "The theory of household behaviour under rationing," European Economic Review, Elsevier, vol. 13(1), pages 25-42, January. [Downloadable!] (restricted)
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(explanations, 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.)

  1. Timothy F. Bresnahan & Scott Stern & Manuel Trajtenberg, 1995. "Market Segmentation and the Sources of Rents from Innovation: Personal Computers in the Late 1980s," Working Papers 95001, Stanford University, Department of Economics. [Downloadable!]
    Other versions:
  2. W. Erwin Diewert, 1995. "Price and Volume Measures in the System of National Accounts," NBER Working Papers 5103, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Shubham Chaudhuri & Pinelopi K. Goldberg & Panle Jia, 2003. "The Effects of Extending Intellectual Property Rights Protection to Developing Countries: A Case Study of the Indian Pharmaceutical," Discussion Papers 0304-08, Columbia University, Department of Economics. [Downloadable!]
  4. Shubham Chaudhuri & Pinelopi K. Goldberg & Panle Jia, 2003. "Estimating the Effects of Global Patent Protection in Pharmaceuticals: A Case Study of Quinolones in India," NBER Working Papers 10159, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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