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Quality Adjustment at Scale: Hedonic versus Exact Demand-Based Price Indices

Author

Listed:
  • Gabriel Ehrlich
  • John Haltiwanger
  • Ron Jarmin
  • David Johnson
  • Ed Olivares
  • Luke Pardue
  • Matthew D. Shapiro
  • Laura Yi Zhao

Abstract

Item-level transactions data yield cost-of-living indices that can account for quality change and consumer substitution. Transactions data require confronting the rapid turnover of items because prices of new and existing products are interrelated in equilibrium. This paper evaluates multiple approaches to measuring quality change at scale. It shows that a hedonic superlative approach—using econometrics or machine learning for hedonic estimation combined with index formulas that require simultaneous observation of item-level price and expenditure—yields improved measures of the cost of living. Accounting for ubiquitous quality change and for consumer substitution yields lower measures of inflation than traditional, official methods.

Suggested Citation

  • Gabriel Ehrlich & John Haltiwanger & Ron Jarmin & David Johnson & Ed Olivares & Luke Pardue & Matthew D. Shapiro & Laura Yi Zhao, 2026. "Quality Adjustment at Scale: Hedonic versus Exact Demand-Based Price Indices," American Economic Review, American Economic Association, vol. 116(6), pages 1955-1995, June.
    • Handle: RePEc:aea:aecrev:v:116:y:2026:i:6:p:1955-95
    DOI: 10.1257/aer.20230766
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    References listed on IDEAS

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    1. 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.
    2. Redding, Stephen J. & Weinstein, David E., 2024. "Accounting for trade patterns," Journal of International Economics, Elsevier, vol. 150(C).
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    More about this item

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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