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A Reconsideration of Hedonic Price Indices with an Application to PC's

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  • Ariel Pakes

Abstract

This paper provides a justification for hedonic price indices and details the properties of hedonic price functions. The analysis is done in a market setting in which a finite number of goods, each defined by its characteristics, interact. We note that proper hedonic indices can be constructed from the same data currently used to construct matched model indices. Since the matched model index does not incorporate price changes for goods which exit, and the goods that exited tend to be those goods whose prices fall, the matched model index has a selection problem which biases it upwards. The hedonic index does not have this problem. We illustrate with a new study of price indices for PC's. The hedonic index shows steep price declines in every year. On average, the matched model indices indicate no price fall at all and one commonly used matched model index is negatively correlated with the hedonic. We also construct and compare alternative price indices used either in research or by the federal statistical agencies. Of these the one that seems to work well is a Pasche style hedonic. Its advantage is that since it does not require computation of the current period's hedonic function, it is easier to use when monthly timetables need to be met.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8715.

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Date of creation: Jan 2002
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Publication status: published as Pakes, Ariel. "A Reconsideration Of Hedonic Price Indexes With An Application To PC's," American Economic Review, 2003, v93(5,Dec), 1578-1614.
Handle: RePEc:nbr:nberwo:8715

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  1. Aviv Nevo, 2001. "New Products, Quality Changes and Welfare Measures Computed From Estimated Demand Systems," NBER Working Papers 8425, National Bureau of Economic Research, Inc.
  2. Hulten, Charles R. & Wykoff, Frank C., 1981. "The estimation of economic depreciation using vintage asset prices : An application of the Box-Cox power transformation," Journal of Econometrics, Elsevier, vol. 15(3), pages 367-396, April.
  3. Feenstra, R.C., 1995. "Exact Hedonic Price Indexes," Papers 95-11, California Davis - Institute of Governmental Affairs.
  4. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  5. Epple, Dennis, 1987. "Hedonic Prices and Implicit Markets: Estimating Demand and Supply Functions for Differentiated Products," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 59-80, February.
  6. Heckman, James J, 1974. "Shadow Prices, Market Wages, and Labor Supply," Econometrica, Econometric Society, vol. 42(4), pages 679-94, July.
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