Prices over the Product Life Cycle: Implications for Quality-Adjustment and the Measurement of Inflation

33 Pages Posted: 15 Oct 2013 Last revised: 29 Oct 2013

See all articles by Daniel Melser

Daniel Melser

Moody's Economy.com

Iqbal A. Syed

UNSW Australia Business School, School of Economics

Date Written: October 29, 2013

Abstract

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 US 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 and at sample rotations. This introduces a systematic bias in the measurement of inflation. For our data we find that the life cycle bias underestimates the measurement of inflation by around 0.30 percentage points each year.

Keywords: Consumer price index (CPI), cost of living, matched-model index, quality change bias, sample rotation, scanner data

JEL Classification: C43, D22, E31

Suggested Citation

Melser, Daniel and Syed, Iqbal A., Prices over the Product Life Cycle: Implications for Quality-Adjustment and the Measurement of Inflation (October 29, 2013). UNSW Australian School of Business Research Paper No. 2013-26. Available at SSRN: https://ssrn.com/abstract=2339830 or http://dx.doi.org/10.2139/ssrn.2339830

Daniel Melser

Moody's Economy.com ( email )

Level 10
1 O'Connell St
SYDNEY, 2000
Australia

Iqbal A. Syed (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

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