Valuation of New Goods under Perfect and Imperfect Competition
AbstractThe 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
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4970.
Date of creation: Dec 1994
Date of revision:
Publication status: published as Jerry A. Hausman. "Valuation of New Goods under Perfect and Imperfect Competition," in Timothy F. Bresnahan and Robert J. Gordon, editors, "The Economics of New Goods" University of Chicago Press (1997)
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- Jerry A. Hausman, 1996. "Valuation of New Goods under Perfect and Imperfect Competition," NBER Chapters, in: The Economics of New Goods, pages 207-248 National Bureau of Economic Research, Inc.
- Hausman, J.A., 1994. "Valuation of New Goods Under Perfect and Imperfect Competition," Working papers 94-21, Massachusetts Institute of Technology (MIT), Department of Economics.
- 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
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.:
- J. A. Hausman & W. E. Taylor, 1980.
"Panel Data and Unobservable Individual Effects,"
255, Massachusetts Institute of Technology (MIT), Department of Economics.
- Hausman, Jerry A. & Taylor, William E., 1981. "Panel data and unobservable individual effects," Journal of Econometrics, Elsevier, vol. 16(1), pages 155-155, May.
- Hausman, Jerry A & Taylor, William E, 1981. "Panel Data and Unobservable Individual Effects," Econometrica, Econometric Society, vol. 49(6), pages 1377-98, November.
- 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.
- G. Burtless & J. A. Hausman, 1977.
"The Effect of Taxation on Labor Supply: Evaluating the Gary Negative Income Tax Experiment,"
211, Massachusetts Institute of Technology (MIT), Department of Economics.
- 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.
- Hausman, Jerry A, 1981. "Exact Consumer's Surplus and Deadweight Loss," American Economic Review, American Economic Association, vol. 71(4), pages 662-76, September.
- Jerry A. Hausman, 1980.
"The effect of wages, taxes, and fixed costs on women's labor force participation,"
in: Econometric Studies in Public Finance, pages 161-194
National Bureau of Economic Research, Inc.
- 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.
- J. Hausman, 1979. "The Effect of Wages, Taxes and Fixed Costs on Women's Labor Force Participation," Working papers 238, Massachusetts Institute of Technology (MIT), Department of Economics.
- Dixit, Avinash K & Stiglitz, Joseph E, 1975.
"Monopolistic Competition and Optimum Product Diversity,"
The Warwick Economics Research Paper Series (TWERPS)
64, University of Warwick, Department of Economics.
- 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.
- Jerry HAUSMAN & Gregory LEONARD & J. Douglas ZONA, 1994. "Competitive Analysis with Differentiated Products," Annales d'Economie et de Statistique, ENSAE, issue 34, pages 159-180.
- Breusch, Trevor S & Mizon, Grayham E & Schmidt, Peter, 1989. "Efficient Estimation Using Panel Data," Econometrica, Econometric Society, vol. 57(3), pages 695-700, May.
- 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.
- Neary, J.P & Roberts, K.W.S, 1978. "The Theory of Household Behaviour under Rationing," The Warwick Economics Research Paper Series (TWERPS) 132, University of Warwick, Department of Economics.
- Hausman, Jerry A, 1978.
"Specification Tests in Econometrics,"
Econometric Society, vol. 46(6), pages 1251-71, November.
- Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, December.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.