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Life Cycle Pricing and the Measurement of Inflation

Author

Listed:
  • Melser, Daniel
  • Syed, Iqbal

Abstract

This paper explores the extent to which goods follow systematic pricing patterns over their life cycle. The theoretical literature, and anecdotal evidence, often suggests that new products are often introduced at high prices which decline as the good ages while, older goods exit the market at a discount. We outline and apply a smoothing-spline approach to the estimation of life cycle price effects using data on two different types of goods (desktop and laptop computers, and personal digital assistants). We interpret these results within a simple conceptual framework and find evidence for the existence of significant life cycle pricing effects. This implies that hedonic pricing functions that exclude age are misspecified. Furthermore, in order to eliminate biases in price indexes, samples must be constructed carefully. Using a simulation we show that the bias introduced by the traditional match-model method may be non-trivial.

Suggested Citation

  • Melser, Daniel & Syed, Iqbal, 2007. "Life Cycle Pricing and the Measurement of Inflation," MPRA Paper 16722, University Library of Munich, Germany, revised 07 Jul 2008.
  • Handle: RePEc:pra:mprapa:16722
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    File URL: https://mpra.ub.uni-muenchen.de/16722/1/MPRA_paper_16722.pdf
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    References listed on IDEAS

    as
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    5. Gordon, Robert J & Griliches, Zvi, 1997. "Quality Change and New Products," American Economic Review, American Economic Association, vol. 87(2), pages 84-88, May.
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Product life cycle; Hedonic regression; Price index; Spline smoothing; Scanner data;

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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