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Exact Hedonic Price Indexes

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Author Info
Robert C. Feenstra

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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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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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Handle: RePEc:nbr:nberwo:5061

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C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

References listed on IDEAS
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  1. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-77, November. [Downloadable!] (restricted)
  2. Swan, Peter L, 1970. "Durability of Consumption Goods," American Economic Review, American Economic Association, vol. 60(5), pages 884-94, December. [Downloadable!] (restricted)
  3. Goldberg, Pinelopi Koujianou, 1995. "Product Differentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry," Econometrica, Econometric Society, vol. 63(4), pages 891-951, July. [Downloadable!] (restricted)
  4. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January. [Downloadable!] (restricted)
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  5. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn. [Downloadable!] (restricted)
  6. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb.. [Downloadable!] (restricted)
  7. Jones, Larry E, 1988. "The Characteristics Model, Hedonic Prices, and the Clientele Effect," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 551-67, June. [Downloadable!] (restricted)
  8. Pollak, Robert A, 1978. "Welfare Evaluation and the Cost-of-Living Index in the Household Production Model," American Economic Review, American Economic Association, vol. 68(3), pages 285-99, June. [Downloadable!] (restricted)
  9. Robert C. Feenstra, 1993. "Measuring the Welfare Effect of Quality Change: Theory and Application of Japanese Autos," NBER Working Papers 4401, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Abel, Andrew B, 1983. "Market Structure and the Durability of Goods," Review of Economic Studies, Blackwell Publishing, vol. 50(4), pages 625-37, October. [Downloadable!] (restricted)
  11. Sato, Kazuo, 1976. "The Ideal Log-Change Index Number," The Review of Economics and Statistics, MIT Press, vol. 58(2), pages 223-28, May. [Downloadable!] (restricted)
  12. Pollak, Robert A., 1983. "The treatment of `quality' in the cost of living index," Journal of Public Economics, Elsevier, vol. 20(1), pages 25-53, February. [Downloadable!] (restricted)
  13. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May. [Downloadable!] (restricted)
  14. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July. [Downloadable!] (restricted)
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