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Implications of Consumer Heterogeneity on Price Measures for Technology Goods

42 Pages Posted: 6 Aug 2010 Last revised: 13 Aug 2010

Ana M. Aizcorbe

U.S. Bureau of Economic Analysis (BEA)

Adam Hale Shapiro

Federal Reserve Bank of San Francisco

Date Written: August 10, 2010

Abstract

Using a new dataset on household purchases of personal computers (PCs), we document positive correlations between buyers' incomes and the prices they pay for seemingly identical PCs. These results suggest that firms may be successful at separating the market and charging different prices to consumers with different levels of willingness to pay. We consider the implications of this kind of market separation for price and quality measurement via a theoretical model based on Mussa and Rosen (1978). The model suggests that, in markets like these, standard methods that do not account for this heterogeneity can understate inflation in a cost-of-living context. Consistent with the model, our empirical work shows that controlling for income yields indexes that show slower price declines than seen in standard indexes. This understatement of the cost-of-living measure likely mitigates the unrelated upward biases found in recent studies by Bils (2009), Erickson and Pakes (2010), Broda and Weinstein (2010).

Keywords: price measurement, innovation, computers

JEL Classification: D40, L10, L63, O30, C43

Suggested Citation

Aizcorbe, Ana M. and Shapiro, Adam Hale, Implications of Consumer Heterogeneity on Price Measures for Technology Goods (August 10, 2010). Available at SSRN: https://ssrn.com/abstract=1653493 or http://dx.doi.org/10.2139/ssrn.1653493

Ana M. Aizcorbe

U.S. Bureau of Economic Analysis (BEA) ( email )

1441 L Street NW
Washington, DC 20910
United States

Adam Hale Shapiro (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

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