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Prices over the Product Life Cycle: An Empirical Analysis

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  • Iqbal Syed

    ()
    (School of Economics, University of New South Wales)

  • Daniel Melser

    ()
    (Department of Economics, Monash University)

Abstract

This paper explores the extent to which goods follow systematic pricing patterns over their life cycle. The theoretical literature, and anecdotal evidence, suggests that new products are often introduced at high prices which decline as the good ages while, older goods exit the market at a discount. We outline and apply a smoothing-spline approach to the estimation of life cycle pricing effects using data on two different types of goods; supermarket products (beer, canned soup and cereals) and high-tech goods (desktop and laptop computers, and personal digital assistants). We interpret these results within a simple conceptual framework and find evidence for the existence of significant life cycle pricing effects. This implies that hedonic pricing functions which exclude age are misspecified. Furthermore, in order to eliminate bias price index samples must be constructed carefully. Using a simulation we show that the bias introduced by the traditional match-model method may be non-trivial.

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Bibliographic Info

Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2008-25.

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Length: 24 pages
Date of creation: Nov 2008
Date of revision:
Handle: RePEc:swe:wpaper:2008-25

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Keywords: Product life cycle; Hedonic regression; Price index; Spline smoothing;

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  1. Reinsdorf, Marshall B, 1999. "Using Scanner Data to Construct CPI Basic Component Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(2), pages 152-60, April.
  2. Hausman, Jerry, 1999. "Cellular Telephone, New Products, and the CPI," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(2), pages 188-94, April.
  3. Winston T.H. Koh, 2005. "The Micro-foundations of Intertemporal Price Discrimination," Microeconomics Working Papers 22456, East Asian Bureau of Economic Research.
  4. Berndt, Ernst R & Griliches, Zvi & Rosett, Joshua G, 1993. "Auditing the Producer Price Index: Micro Evidence from Prescription Pharamceutical Preparations," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 251-64, July.
  5. Gordon, Robert J & Griliches, Zvi, 1997. "Quality Change and New Products," American Economic Review, American Economic Association, vol. 87(2), pages 84-88, May.
  6. W. Erwin Diewert, 2003. "Hedonic Regressions. A Consumer Theory Approach," NBER Chapters, in: Scanner Data and Price Indexes, pages 317-348 National Bureau of Economic Research, Inc.
  7. Robert J. Hill & Daniel Melser, 2007. "Comparing House Prices Across Regions and Time: An Hedonic Approach," Discussion Papers 2007-33, School of Economics, The University of New South Wales.
  8. Ernst R. Berndt & Margaret Kyle & Davina Ling, 2003. "The Long Shadow of Patent Expiration. Generic Entry and Rx-to-OTC Switches," NBER Chapters, in: Scanner Data and Price Indexes, pages 229-274 National Bureau of Economic Research, Inc.
  9. Helen X.H. Bao & Alan T.K. Wan, 2004. "On the Use of Spline Smoothing in Estimating Hedonic Housing Price Models: Empirical Evidence Using Hong Kong Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(3), pages 487-507, 09.
  10. Robert C. Feenstra & Matthew D. Shapiro, 2003. "Scanner Data and Price Indexes," NBER Books, National Bureau of Economic Research, Inc, number feen03-1.
  11. Kees Jan Van Garderen & Chandra Shah, 2002. "Exact interpretation of dummy variables in semilogarithmic equations," Econometrics Journal, Royal Economic Society, vol. 5(1), pages 149-159, June.
  12. Jack Triplett, 2004. "Handbook on Hedonic Indexes and Quality Adjustments in Price Indexes: Special Application to Information Technology Products," OECD Science, Technology and Industry Working Papers 2004/9, OECD Publishing.
  13. Daniel Melser, 2006. "Accounting For The Effects Of New And Disappearing Goods Using Scanner Data," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 52(4), pages 547-568, December.
  14. Michael Landsberger & Isaac Meilijson, 1985. "Intertemporal Price Discrimination and Sales Strategy under Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 424-430, Autumn.
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