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Calculating Hedonic Price Indices with Unobserved Product Attributes: An Application to the UK Car Market

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  • FRANCISCO REQUENA-SILVENTE
  • JAMES WALKER

Abstract

We show that hedonic price indices that omit model-specific unobservable product attributes are subject to considerable bias. We utilize a complete panel of new car versions marketed in the UK over 1971-98 which incorporates over 100 observable product characteristics, sales weighting to capture the distribution of purchases across models, and model-specific fixed effects to account for unobservable characteristics. We find that quality-adjusted prices obtained from hedonic regressions that do not account for unobservable characteristics exhibit a severe downward bias. We also show that quality-adjusted prices exhibit distinct sub-market differences having increased in 'mass production' segments and decreased in 'specialized niches'. Copyright (c) The London School of Economics and Political Science 2006.

Suggested Citation

  • Francisco Requena-Silvente & James Walker, 2006. "Calculating Hedonic Price Indices with Unobserved Product Attributes: An Application to the UK Car Market," Economica, London School of Economics and Political Science, vol. 73(291), pages 509-532, August.
  • Handle: RePEc:bla:econom:v:73:y:2006:i:291:p:509-532
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    References listed on IDEAS

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    1. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    2. Benkard, C. Lanier & Bajari, Patrick, 2003. "Hedonic Price Indexes with Unobserved Product Characteristics, and Application to PC's," Research Papers 1841, Stanford University, Graduate School of Business.
    3. C. Lanier Benkard & Patrick Bajari, 2003. "Hedonic Price Indexes with Unobserved Product Characteristics, and Application to PC's," NBER Working Papers 9980, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Drelichman, Mauricio & González Agudo, David, 2014. "Housing and the cost of living in early modern Toledo," Explorations in Economic History, Elsevier, vol. 54(C), pages 27-47.
    2. Ana Isabel Guerra Hernández, 2007. "Effects of Competition over Quality-Adjusted Price Indexes: An Application to the Spanish Automobile Market," Working Papers wpdea0707, Department of Applied Economics at Universitat Autonoma of Barcelona.
    3. Naoki Watanabe & Ryo Nakajima & Takanori Ida, 2010. "Quality-Adjusted Prices of Japanese Mobile Phone Handsets and Carriers’ Strategies," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 36(4), pages 391-412, June.
    4. Xosé-Luís Varela-Irimia, 2014. "Age effects, unobserved characteristics and hedonic price indexes: The Spanish car market in the 1990s," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 5(4), pages 419-455, November.
    5. repec:pje:journl:article27sumii is not listed on IDEAS
    6. Knittel, Christopher R., 2009. "Automobiles on Steroids: Product Attribute Trade-O�s and Technological Progress in the Automobile Sector," Institute of Transportation Studies, Working Paper Series qt2nt1r1x1, Institute of Transportation Studies, UC Davis.

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