Hedonic Price Indexes with Unobserved Product Characteristics, and Application to PC's
AbstractWe show that hedonic price indexes may be biased when not all product characteristics are observed. We derive two primary sources of bias. The first is a classical selection problem that arises due to changes over time in the values of unobserved characteristics. The second comes from changes in the implicit prices of unobserved characteristics. Next, we show that the bias can be corrected for under fairly general assumptions using extensions of factor analysis methods. We test our methods empirically using a new comprehensive monthly data set for desktop personal computer systems. For this data we find that the standard hedonic index has a slight upward bias of approximately 1.4\% per year. We also find that omitting an important characteristic (CPU benchmark) causes a large bias in the index with standard methods, but that this bias is essentially eliminated when the proposed correction is applied.
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Date of creation: Sep 2003
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Find related papers by JEL classification:
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-07-18 (All new papers)
- NEP-EVO-2003-09-24 (Evolutionary Economics)
- NEP-INO-2003-09-24 (Innovation)
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