New Products, Quality Changes, and Welfare Measures Computed from Estimated Demand Systems
This paper examines the construction of a price index based on an estimated-demand system. In principle the method examined can produce a price index that takes account of the introduction of new products and quality changes in existing products. However, I isolate two key assumptions that have to be made in order to interpret the demand estimates into welfare measures. Using estimates of a brand-level demand system for ready-to-eat cereal, I demonstrate the empirical importance of the assumptions. For the data I use, depending on the interpretation of the demand estimates, a price index can range between a 35% increase over the five years examined to a 2.4% decrease. © 2003 President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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Volume (Year): 85 (2003)
Issue (Month): 2 (May)
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