Life Cycle Price Trends and Product Replacement: Implications for the Measurement of Inflation

The paper explores the extent to which products follow systematic pricing patterns over their life cycle and the impact this has on the measurement of inflation. Using a large U.S. scanner data set on supermarket products and applying flexible regression methods, we find that on average prices decline as items age. This life cycle price change is often attributed to quality difference in the construction of CPI as items are replaced due to disappearance or during sample rotations. This introduces a systematic bias in the measurement of inflation. For our data we find that the life cycle bias leads to the underestimation of inflation by around 0.30 percentage points each year for the products examined.     

Faster,smaller, cheaper: an hedonic price analysis of PDAs

We compute quality-adjusted price indexes for personal digital assistants (PDAs) for the period 1999 to 2004. Hedonic regressions indicate that prices are related to processor generation and clock speed, memory capacity, screen size and quality and the presence of a digital camera or wireless capability. A particularly salient feature of PDAs is portability, where we find: (i) purchasers value the energy density of the battery technology (e.g. lithium ion) rather than the battery life in hours; and (ii) the physical characteristics of the PDA (e.g. weight, volume) are nonlinearly related to price, suggesting that valuation of the physical form of PDAs does not bear a simple linear relationship to characteristics, either in absolute terms (‘smaller is better’) or vs. an ergonomic ‘sweet spot’. Rather, portability characteristics are correlated with other desirable attributes, making the relationship between price and portability difficult to disentangle. However, hedonic price indexes are robust across different measures of the portability of PDAs. Hedonic indexes using the dummy variable, characteristics prices, and imputation approaches decline on average between 19 and 26% per year. A matched model price index computed from a subset of observations declines at 19% per year, while a fixed-effects hedonic index declines at 14% per year.     

How Fast are Semiconductor Prices Falling?

The Producer Price Index (PPI) for the U.S. suggests that semiconductor prices have barely been falling in recent years, a dramatic contrast to the rapid declines reported from the mid‐1980s to the early 2000s. This slowdown in the rate of decline is puzzling in light of evidence that the performance of microprocessor units (MPUs) has continued to improve at a rapid pace. Over the course of the 2000s, the MPU prices posted by Intel, the dominant producer of MPUs, became much stickier over the chips' life cycle. As a result of this change, we argue that the matched‐model methodology used in the PPI for MPUs likely started to be biased after the early 2000s and that hedonic indexes can provide a more accurate measure of price change since then. MPU prices fell rapidly through 2004 on every price measure we present, with the PPI declining at an even quicker pace than the hedonic indexes. However, from 2004 to 2009, our preferred hedonic index fell faster than the PPI, and from 2009 to 2013 the gap widened further, with our preferred index falling at an average annual rate of 42 percent, while the PPI declined at only a 6 percent rate. Given that MPUs currently represent about half of U.S. shipments of semiconductors, this difference has important implications for gauging the rate of innovation in the semiconductor sector.     

Prices,product differentiation and quality measurement: A comparison between hedonic and matched model methods

The paper provides an analysis of the problems of construction of quality-adjusted price indexes within the framework of the theory of product differentiation. In the general case of price-making behaviour on the part of firms, hedonic regressions are defined on the basis of reduced forms of the equation relating equilibrium prices to product characteristics. The paper considers the reduced form given by the marginal cost function and shows that the Laspeyres hedonic price index provides a lower bound to the quality-adjusted rate of price change while the Paasche hedonic price index provides an upper bound to the quality-adjusted rate of price change. The properties of hedonic price indexes are compared with those of matched model indexes. The theory is applied to the study of personal computer prices in Italy during the 1995–2000 period.     

Impact Fees and Real Estate Prices: Evidence from 35 Chinese Cities

Local governments often charge developers impact fees to finance local public goods. This has been practiced in Chinese cities for more than two decades; however, no empirical studies have tested the effect of impact fees on real estate prices. Using a panel data set for 35 large- and medium-sized cities from 1998 to 2008, we find that impact fees lead to a significant increase in real estate prices. For a given city, an increase in impact fees by one yuan leads to an increase of about 5 yuan in the price of newly-built housing; a 1% increase in impact fees leads to an increase of 5 percentage points in the housing price index and 7 percentage points in the land price index.     

Residential property price differentials of waste plants: evidence from Beijing,China

As a primary source of urban pollution, waste plants release toxic gases and polluted waste water that can cause great harm to human health and contaminate water resources. The adverse impact of waste plants on environmental threaten the quality of life of surrounding residents which will be reflected in residential property values. In this study, we develop a hedonic price model to estimate the environmental externalities of waste plants based on a panel dataset for real-estate transactions in Beijing from 2011 to 2015. We apply fixed effects and a Heckman selection model to control for omitted variable bias and sample selection bias and then construct price counterfactuals for properties. The price differentials between expected and counterfactual prices are then calculated. Our empirical results suggest that waste plants negatively influence residential property prices. Additionally, the influences of other factors, such as school district, traffic convenience, and average housing area, on property prices are consistent with common sense, though they are weakened for properties within three kilometers of waste plants.     

Technical change, prices and communications technology: Insights from the Local Area Networking industry

We use hedonic regressions to analyse price changes in two categories of Local Area Networking (LAN) equipment: hubs and switches. Constant quality price indexes are constructed from the regressions and contrasted with available indexes constructed for the same type of equipment. We find that prices fell at an average annual rate between 22% and 33% during the 1990s. The results suggest that beside falling prices of inputs (i.e. semiconductors), technical change in the LAN equipment may be responsible for the decrease in the prices of communication equipment during the 1990s.     

Offshoring,Sourcing Substitution Bias,and the Measurement of Growth in U.S. Gross Domestic Product and Productivity

The decade before the financial crisis of 2008 was a time of large changes in sourcing patterns for manufactured goods, particularly after China's entry into the WTO in 2001. Sourcing substitution reduced the prices paid by wholesale level buyers of these goods, but these price reductions were mostly not captured in the U.S. import price indexes and the U.S. GDP deflator. To find plausible values for sourcing bias we first use data on changes in sourcing patterns over 1997–2007 to predict the effect of the reported price discount from the new emerging market suppliers. Next, we compare adjusted import price indexes for products used for household consumption with consumer price indexes. In the GDP deflator for apparel imports, sourcing bias is found to average 0.6 percent per year, and for durable goods it averages 1 percent per year. During the decade of rapidly changing sourcing patterns, a tenth of the reported speedup in multifactor productivity growth of the U.S. private business sector may have come from sourcing bias in the deflators for imports.     

Using Scanner Data to Estimate Country Price Parities: A Hedonic Regression Approach

This paper uses scanner data from the bar-code readers of retailers to provide estimates of inter-country price parities at the level of the basic heading. The use of such data is appealing given its extensive coverage of transactions, information on weights, prices and characteristics of items at a highly detailed level. The study uses dummy variable hedonic and exact/superlative hedonic index number formulations applied to an inter-country context for both bilateral and multilateral comparisons. Unlike conventional methods, such methods are not confined to matched samples comparisons and thus make use of the entire sample. Their application extends to price survey data using checklists on characteristics. The application is to scanner data on about 1 million transactions for television sets over two months in three countries. It is, to the authors' knowledge, the first such use of scanner data and application of the above hedonic frameworks in this context.     

Energy price shocks and milk price adjustments

Much previous research on energy price transmission sheds light on the relationship between oil prices and aggregate commodity prices, such as for agricultural products, or food price indexes. This letter uses data from 12 U.S. cities between 2001 and 2011 to examine how energy prices are transmitted to fluid milk products at the retail level. Results indicate the existence of an asymmetric energy pass-through (a rise is transmitted faster than a fall in prices) and that private label milk products are more insulated from energy price shocks and adjust at similar rate with national manufacturer brands.     

Estimating Quality‐adjusted Price Changes: Method and Application to VCRs

This paper uses scanner data to generate estimates of quality‐adjusted price changes for video‐recorders. We use hedonic regressions to derive estimates of the changing worth of each quality component. These are then applied to weighted changes in the mix of quality attributes of products to derive estimates of quality‐adjusted price (QAP) changes. The data source used is electronic‐point‐of‐sale (EPOS) scanner data that are available for a wide range of goods. This study provides an example of how such methods can be more widely applied. The estimates of QAP changes correspond to constant‐utility, (hedonic) cost‐of‐living indexes defined in economic theory as the ratio of expenditure functions at constant utility allowing for changing prices and characteristics of goods. This method is proposed as an improvement on the existing direct method , which takes its estimates directly from the coefficients associated with 'time dummies' in a hedonic regression. We finally undertake a matching process, akin to that used by statistical offices, and compare the results. Direct comparisons with RPI estimates and these hedonic approaches are not easy since the approaches use quite different data sets. Our replication of a procedure akin to that used for the RPI on the scanner data set provides insights into sources of potential bias.     

Price Index Convergence Among United States Cities*

We study the dynamics of price indices for major U.S. cities using panel econometric methods and find that relative price levels among cities mean revert at an exceptionally slow rate. In a panel of 19 cities from 1918 to 1995, we estimate the half‐life of convergence to be approximately nine years. The surprisingly slow rate of convergence can be explained by a combination of the presence of transportation costs, differential speeds of adjustment to small and large shocks, and the inclusion of nontraded goods prices in the overall price index.     

The price of broadband quality: tracking the changing valuation of service characteristics

This paper investigates how retail broadband prices, choice and quality are changing over time. Using a data set containing daily observations of plans offered in Ireland from 2007 to 2013, this paper applies hedonic modelling techniques to observe the changing pricing of service characteristics. Although we find that average nominal prices remain static throughout our sample period, quality of service has risen dramatically over time, particularly with respect to download speed. Some characteristics of broadband plans exhibit broadly stable valuations over time, but the elasticity of price with respect to advertised download speed and the premium on bundled services declined for most types of broadband plans during the sample period. In addition, the retail price premium enjoyed by the incumbent operator fell significantly since 2007.     

Elementary Index Bias: Evidence for the Euro Area from a Large Scanner Dataset

We provide evidence on the effect of elementary index choice on inflation measurement in the euro area. Using scanner data for 15,844 individual items from 42 product categories and 10 euro area countries, we compute product category level elementary price indexes using eight different elementary index formulas. Measured inflation outcomes of the different index formulas are compared with the Fisher ideal index to quantify elementary index bias. We have three main findings. First, elementary index bias is quite variable across product categories, countries and index formulas. Second, a comparison of elementary index formulas with and without expenditure weights shows that a shift from price only indexes to expenditure weighted indexes would entail at the product level multiple percentage points differences in measured price changes. And finally, we show that elementary index bias is quantitatively more important than upper level substitution bias.     

Alternative Land-Price Indexes for Commercial Properties in Tokyo

The System of National Accounts (SNA) requires separate estimates for the land and structure components of a commercial property. Using transactions data for the sales of office buildings in Tokyo, a hedonic regression model (the “builder’s model”) was estimated and this model generated an overall property price index as well as subindexes for the land and structure components of the office buildings. The builder’s model was also estimated using appraisal data on office building real estate investment trusts (REITs) for Tokyo. These hedonic regression models also generated estimates for net depreciation rates, which can be compared. Finally, the Japanese government constructs annual official land prices for commercial properties based on appraised values. The paper compares these official land prices with the land prices generated by the hedonic regression models based on transactions data and on REIT data. The results reveal that commercial property indexes based on appraisal and assessment prices lag behind the indexes based on transaction prices.     

Chained,exact and superlative hedonic price changes: estimates from microdata

Scanner data are used to calculate chained, exact (and superlative) hedonic price indexes for television sets. The data source is available for a wide range of goods, the application providing an example of how this method can be more widely applied. The indexes correspond to constant utility, hedonic cost-of-living indexes. The approach improves on the existing direct method, which takes its estimates directly from the coefficients on time dummies in a hedonic regression. It also improves on the matched model method used by statistical agencies. The differences between actual price changes and exact hedonic quality-adjusted price changes are found to be substantial. Base-period and current-period weighted exact hedonic indexes are similar, thus providing good approximations to a superlative index. Estimates from the direct, dummy variable approach were compared to the superlative indexes. The disparities between the results argue for caution in the use of the direct, dummy variable approach to estimating quality-adjusted price changes.     

An Index Approach to Measuring Product Differentiation: A Hedonic Analysis of Airfares

The main objective of this paper is to introduce an Allen-type index of differentiation based on cost functions. With this index, we create an economic measure of product differentiation that quantifies differences between products. Applied research has some generally accepted economic measures, for example, the Herfindahl–Hirschman Index for market concentration, or the Gini coefficient for inequality. Product differentiation, however, does not yet have an established measure. Our objective is to fill that gap and introduce a measure that can be used in market-related applied research such as market power, antitrust, price indexes, or market strategy. To operationalize the index, we introduce the concept of a core product and use cost functions to measure the degree of differentiation from the core product. To demonstrate the use of the index, we study the effect of product differentiation on price formation in the airline industry using an enhanced hedonic model. The model is empirically tested on 103,980 observations of quarterly US domestic airfare data between 2002 and 2016 and shows that product differentiation has a significant effect on both price and mark-up.     

Intranational Price Convergence and Price Stickiness: Evidence from Denmark

We show that estimates of the half‐life of deviations from the law of one price are biased when their precision is not taken into account when aggregating data for different types of goods. Using a comprehensive dataset with monthly price data for 124 homogeneous products across regions in Denmark over the period 1997–2010, we find a large positive aggregation bias. On average, we find that the half‐life is 8.4 months when taking the bias into account, compared with 28.7 months when applying the standard method. The heterogeneity in the estimated half‐life can be explained by price stickiness, distance between regions, and whether the good is traded or non‐traded.     

Innovation and price: the case of digital cameras

This study examines a hedonic regression model of digital camera prices using data collected from an internet price comparison service. We find that a small number of product characteristics explains most of the variation in camera prices. In addition, the model demonstrates substantial downward pressure on camera prices during the time period considered. We also examine technological innovation shocks to determine their impact on product prices. We find that the corresponding price reaction exhibits gradual adjustment over time, providing evidence of some degree of anticipation of the innovation, as well as a post-innovation price shock. This study also demonstrates the power of web-based shopping services as a new and novel source of data for econometric analysis.     

ASSESSING THE QUALITY ERROR IN OUTPUT MEASURES: THE CASE OF REFRIGERATORS*

This paper computes new indexes of output for refrigerators, using hedonic methods to adjust for quality change. The hedonic technique is applied in a new way (it is used to make quality adjustments to prices before they are used in the index), and the results are compared with those from methods used in previous hedonic investigations. There are three major findings. (1) Overall (1960–1972), our hedonic deflated output series rise more rapidly than conventional measures, because the price indexes used for deflation rise more slowly. (2) The output measures fluctuate more than do output measures produced by conventional methods, because adding hedonic quality adjustments to WPI indexes moves them up in some years and down in others, and the resulting adjustments to the output series were positively correlated with changes in output. (3) Applying methods used in previous studies produces larger adjustments to the published indexes, suggesting that some of the differences noted in previous studies between hedonic indexes and official published indexes are related to computational methods, not to quality adjustment.