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 accounts for 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% percent increase over the five years examined to a 2.4% decrease.
|Date of creation:||Aug 2001|
|Date of revision:|
|Publication status:||published as Nevo, Aviv. "New Products, Quality Changes, And Welfare Measures Computed From Estimated Demand Systems," Review of Economics and Statistics, 2003, v85(2,May), 266-275.|
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