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Exact Hedonic Price Indexes

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  • Robert C. Feenstra

Abstract

The purpose of this paper is to identify conditions under which hedonic price indexes provide an exact measure of consumer welfare. Our results provide a rationale for existing practices in the case where prices equal marginal costs. In that case, both the marginal value of characteristics and a fixed-weight price index can be estimated from a hedonic regression. Using the marginal value of characteristics, we show how to construct bounds on the exact hedonic price index. When prices are above marginal costs then our bounds still apply, but the value of characteristics cannot be measured so easily. Since the price-cost markups are an omitted variable in the hedonic regression, they will bias the coefficients obtained. For a special class of utility functions, we argue that a linear regression will still provide a measure of the marginal value of characteristics, but a log-linear regression will overstate these values.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5061.

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Date of creation: Mar 1995
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Publication status: published as Review of Economics and Statistics, Vol. 77, no. 4 (November 1995): 634-653 .
Handle: RePEc:nbr:nberwo:5061

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  1. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  2. Bresnahan, Timothy F., 1981. "Departures from marginal-cost pricing in the American automobile industry : Estimates for 1977-1978," Journal of Econometrics, Elsevier, Elsevier, vol. 17(2), pages 201-227, November.
  3. Robert C. Feenstra, 1993. "Measuring the Welfare Effect of Quality Change: Theory and Application of Japanese Autos," NBER Working Papers, National Bureau of Economic Research, Inc 4401, National Bureau of Economic Research, Inc.
  4. Goldberg, Pinelopi Koujianou, 1995. "Product Differentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry," Econometrica, Econometric Society, Econometric Society, vol. 63(4), pages 891-951, July.
  5. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, Elsevier, vol. 4(2), pages 115-145, May.
  6. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 59(1), pages 25-59, January.
  7. Pollak, Robert A, 1978. "Welfare Evaluation and the Cost-of-Living Index in the Household Production Model," American Economic Review, American Economic Association, American Economic Association, vol. 68(3), pages 285-99, June.
  8. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 63(4), pages 841-90, July.
  9. Swan, Peter L, 1970. "Durability of Consumption Goods," American Economic Review, American Economic Association, American Economic Association, vol. 60(5), pages 884-94, December.
  10. Zvi Griliches, 1991. "Hedonic Price Indexes and the Measurement of Capital and Productivity: Some Historical Reflections," NBER Chapters, National Bureau of Economic Research, Inc, in: Fifty Years of Economic Measurement: The Jubilee of the Conference on Research in Income and Wealth, pages 185-206 National Bureau of Economic Research, Inc.
  11. Abel, Andrew B, 1983. "Market Structure and the Durability of Goods," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 50(4), pages 625-37, October.
  12. Pollak, Robert A., 1983. "The treatment of `quality' in the cost of living index," Journal of Public Economics, Elsevier, Elsevier, vol. 20(1), pages 25-53, February.
  13. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, Econometric Society, vol. 58(6), pages 1255-77, November.
  14. Sato, Kazuo, 1976. "The Ideal Log-Change Index Number," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 58(2), pages 223-28, May.
  15. Jones, Larry E, 1988. "The Characteristics Model, Hedonic Prices, and the Clientele Effect," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(3), pages 551-67, June.
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