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Implications of Consumer Heterogeneity on Price Measures for Technology Goods

  • Adam Hale Shapiro
  • Ana Aizcorbe

    (Bureau of Economic Analysis)

Using a new dataset on household purchases of personal computers (PCs), we document positive correlations between buyers' incomes and the prices they pay for seemingly identical PCs. These results suggest that ¯rms may be successful at separating the market and charging di®erent prices to consumers with di®erent levels of willingness to pay. We consider the implications of this kind of market separation for price and quality measurement via a theoretical model based on Mussa and Rosen (1978). The model suggests that, in markets like these, stan- dard methods that do not account for this heterogeneity can understate in°ation in a cost-of-living context. Consistent with the model, our empirical work shows that controlling for income yields indexes that show slower price declines than seen in standard indexes. This understatement of the cost-of-living measure likely mit- igates the unrelated upward biases found in recent studies by Bils (2009), Erickson and Pakes (2010), Broda and Weinstein (2010).

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Paper provided by Bureau of Economic Analysis in its series BEA Working Papers with number 0062.

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Date of creation: Aug 2010
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Handle: RePEc:bea:wpaper:0062
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  1. Ana Aizcorbe, 2006. "Why Did Semiconductor Price Indexes Fall So Fast in the 1990s? A Decomposition," Economic Inquiry, Western Economic Association International, vol. 44(3), pages 485-496, July.
  2. Adam Hale Shapiro & Adam Copeland, 2010. "The Impact of Competition on Technology Adoption: An Apples-to-PCs Analysis," 2010 Meeting Papers 181, Society for Economic Dynamics.
  3. Tim Erickson & Ariel Pakes, 2011. "An Experimental Component Index for the CPI: From Annual Computer Data to Monthly Data on Other Goods," American Economic Review, American Economic Association, vol. 101(5), pages 1707-38, August.
  4. Carol Corrado & Wendy E. Dunn & Maria Ward Otoo, 2006. "Incentives and prices for motor vehicles: what has been happening in recent years?," Finance and Economics Discussion Series 2006-09, Board of Governors of the Federal Reserve System (U.S.).
  5. Nelson, Randy A & Tanguay, Tim L & Patterson, Christopher D, 1994. "A Quality-Adjusted Price Index for Personal Computers," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(1), pages 23-31, January.
  6. Nair, Harikesh S., 2006. "Intertemporal Price Discrimination with Forward-Looking Consumers: Application to the US Market for Console Video-Games," Research Papers 1947, Stanford University, Graduate School of Business.
  7. Bart Hobijn, 2002. "On both sides of the quality bias in price indexes," Staff Reports 157, Federal Reserve Bank of New York.
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