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Prices over the Product Life Cycle: Implications for Quality-Adjustment and the Measurement of Inflation

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Author Info

  • Daniel Melser

    ()
    (Moody's Economy.com)

  • Iqbal A. Syed

    ()
    (School of Economics, Australian School of Business, the University of New South Wales)

Abstract

The paper explores the extent to which products follow systematic pricing patterns over their life cycle and the impact this has on the measurement of inflation. Using a large US scanner data set on supermarket products and applying exible regression methods, we find that on average prices decline as items age. This life cycle price change is often attributed to quality difference in the construction of CPI as items are replaced due to disappearance and at sample rotations. This introduces a systematic bias in the measurement of inflation. For our data we find that the life cycle bias underestimates the measurement of inflation by around 0.30 percentage points each year.

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File URL: http://research.economics.unsw.edu.au/RePEc/papers/2013-26.pdf
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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 2013-26.

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Length: 33 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:swe:wpaper:2013-26

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Related research

Keywords: Consumer price index (CPI); cost of living; matched-model index; quality change bias; sample rotation; scanner data;

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  1. David E. Lebow & Jeremy B. Rudd, 2003. "Measurement Error in the Consumer Price Index: Where Do We Stand?," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 159-201, March.
  2. Adam Copeland, 2013. "Seasonality, consumer heterogeneity and price indexes: the case of prepackaged software," Journal of Productivity Analysis, Springer, vol. 39(1), pages 47-59, February.
  3. 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.
  4. Robert J. Hill & Daniel Melser, 2008. "Hedonic Imputation And The Price Index Problem: An Application To Housing," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 593-609, October.
  5. Robert J. Gordon, 2006. "The Boskin Commission Report: A Retrospective One Decade Later," NBER Working Papers 12311, National Bureau of Economic Research, Inc.
  6. Erwin Diewert, 2005. "Weighted Country Product Dummy Variable Regressions And Index Number Formulae," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 51(4), pages 561-570, December.
  7. 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.
  8. Ariel Pakes, 2003. "A Reconsideration of Hedonic Price Indexes with an Application to PC's," American Economic Review, American Economic Association, vol. 93(5), pages 1578-1596, December.
  9. Ernst R. Berndt & Zvi Griliches & Neal Rappaport, 1995. "Econometric Estimates of Prices Indexes for Personal Computers in the 1990s," NBER Working Papers 4549, National Bureau of Economic Research, Inc.
  10. Silver, Mick, 1999. "Disparities in the prices of new and old models when they coexist in the market: some econometric estimates," Omega, Elsevier, vol. 27(1), pages 13-24, February.
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