Exact Hedonic Price Indexes

46 Pages Posted: 27 Aug 2000 Last revised: 31 Oct 2022

See all articles by Robert C. Feenstra

Robert C. Feenstra

University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 1995

Abstract

The purpose of this paper is to identify conditions under which hedonic price indexes provide an exact measure of consumer welfare. Our results provide a rationale for existing practices in the case where prices equal marginal costs. In that case, both the marginal value of characteristics and a fixed-weight price index can be estimated from a hedonic regression. Using the marginal value of characteristics, we show how to construct bounds on the exact hedonic price index. When prices are above marginal costs then our bounds still apply, but the value of characteristics cannot be measured so easily. Since the price-cost markups are an omitted variable in the hedonic regression, they will bias the coefficients obtained. For a special class of utility functions, we argue that a linear regression will still provide a measure of the marginal value of characteristics, but a log-linear regression will overstate these values.

Suggested Citation

Feenstra, Robert C., Exact Hedonic Price Indexes (March 1995). NBER Working Paper No. w5061, Available at SSRN: https://ssrn.com/abstract=225839

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