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Constructing quality-adjusted price indices: a comparison of hedonic and discrete choice models


  • Jonker, Nicole


The Boskin report (1996) concluded that the US consumer price index (CPI) overestimated the inflation by 1.1 percentage points. This was due to several measurement errors in the CPI. One of them is called quality change bias. We compare two methods in this paper which can be used to correct for quality change bias, namely the hedonic method and a method based on the use of discrete choice models. We compare the underlying micro-economic models of the two methods as well as their empirical implementation. Although the discrete choice model has not been used often to calculate quality-adjusted price indices, past research shows that it might be beneficial to do so. JEL Classification: C43, D11, D21, C25

Suggested Citation

  • Jonker, Nicole, 2002. "Constructing quality-adjusted price indices: a comparison of hedonic and discrete choice models," Working Paper Series 0172, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20020172

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    References listed on IDEAS

    1. Amil Petrin, 2001. "Quantifying the Benefits of New Products: The Case of the Minivan," NBER Working Papers 8227, National Bureau of Economic Research, Inc.
    2. Cropper, Maureen L, et al, 1993. "Valuing Product Attributes Using Single Market Data: A Comparison of Hedonic and Discrete Choice Approaches," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 225-232, May.
    3. Aviv Nevo, 2003. "New Products, Quality Changes, and Welfare Measures Computed from Estimated Demand Systems," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 266-275, May.
    4. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
    5. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    6. W. Erwin Diewert, 2003. "Hedonic Regressions. A Consumer Theory Approach," NBER Chapters,in: Scanner Data and Price Indexes, pages 317-348 National Bureau of Economic Research, Inc.
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    Cited by:

    1. John K. Dagsvik & Astrid L. Mathiassen & Bengt J.Eriksson, 2006. "Quality adjusted price indexes for discrete goods," Discussion Papers 490, Statistics Norway, Research Department.
    2. Satoshi Nakano & Kazuhiko Nishimura, 2013. "Welfare gain from quality and price development in the Japan’s LCD TV market," Journal of Evolutionary Economics, Springer, vol. 23(4), pages 889-908, September.
    3. Henning Ahnert & Geoff Kenny, 2004. "Quality adjustment of European price statistics and the role for hedonics," Occasional Paper Series 15, European Central Bank.
    4. C. Deligiorgi & A. Vavoulas & Ch. Michalakelis & D. Varoutas & Th. Sphicopoulos, 2007. "On the construction of price index and the definition of factors affecting tariffs of ADSL connections across Europe," Netnomics, Springer, vol. 8(1), pages 171-183, October.

    More about this item

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory


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