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Quality adjusted price indexes for discrete goods

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Author Info
John K. Dagsvik, Astrid L. Mathiassen and Bengt J.Eriksson () (Statistics Norway)

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Abstract

This paper discusses the construction and computation of a quality adjusted price index when the commodities are differentiated products, such as different brands of automobiles and refrigerators. The method we focus on is an extension of Trajtenberg’s approach. A key result obtained in the paper is that the evolution of the quality adjusted price index depends crucially on the fraction of consumers that do not purchase a variant of the product. The method is applied to data on automobile demand in Norway from 1994 to 2002. Both the Laspeyres index and the index based on hedonic regression yield lower estimates of the pricees from 1999 to 2002 than does the quality adjusted price index. This is mainly due to variations in the fraction of persons who purchase new automobiles.

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Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 490.

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Date of creation: Dec 2006
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Handle: RePEc:ssb:dispap:490

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Related research
Keywords: Quality adjusted price index; Exact index theory; Hedonic price indexes;

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Find related papers by JEL classification:
C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models
C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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  1. Feenstra, Robert C, 1995. "Exact Hedonic Price Indexes," The Review of Economics and Statistics, MIT Press, vol. 77(4), pages 634-53, November. [Downloadable!] (restricted)
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  2. McFadden, Daniel L., 1984. "Econometric analysis of qualitative response models," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 24, pages 1395-1457 Elsevier. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Aviv Nevo, 2003. "New Products, Quality Changes, and Welfare Measures Computed from Estimated Demand Systems," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 266-275, 01. [Downloadable!] (restricted)
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  5. Bartik, Timothy J, 1987. "The Estimation of Demand Parameters in Hedonic Price Models," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 81-88, February. [Downloadable!] (restricted)
  6. Nicole Jonker, 2002. "Constructing quality-adjusted price indices: a comparison of hedonic and discrete choice models," Working Paper Series 172, European Central Bank. [Downloadable!]
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  7. 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)
  8. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer. [Downloadable!] (restricted)
  9. Pakes, Ariel & Berry, Steven & Levinsohn, James A, 1993. "Applications and Limitations of Some Recent Advances in Empirical Industrial Organization: Price Indexes and the Analysis of Environmental Change," American Economic Review, American Economic Association, vol. 83(2), pages 241-46, May.
  10. 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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