Variety-robust axiomatic indices
The price and quantity indices proposed in this paper exactly and unconditionally pass the product test, E = PQ. Because the indices are measured over single sets of products they can be used for the comparison of sets that do not contain the same types of products. Changes in product variety do not lead to biases in these indices. For homothetic functions, the indices can be used to decompose changes in productivity and the cost of living. Shannon’s (1948) entropy is shown to have properties that make it suitable as an index of product variety. This index of product variety is strongly related to the presented price and quantity indices.
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