A Reconsideration of Hedonic Price Indices with an Application to Pc's

58 Pages Posted: 17 Jan 2002 Last revised: 18 Jan 2002

See all articles by Ariel Pakes

Ariel Pakes

National Bureau of Economic Research (NBER); Harvard University - Department of Economics

Date Written: January 2002

Abstract

This paper provides a justification for hedonic price indices and details the properties of hedonic price functions. The analysis is done in a market setting in which a finite number of goods, each defined by its characteristics, interact. We note that proper hedonic indices can be constructed from the same data currently used to construct matched model indices. Since the matched model index does not incorporate price changes for goods which exit, and the goods that exited tend to be those goods whose prices fall, the matched model index has a selection problem which biases it upwards. The hedonic index does not have this problem. We illustrate with a new study of price indices for PC's. The hedonic index shows steep price declines in every year. On average, the matched model indices indicate no price fall at all and one commonly used matched model index is negatively correlated with the hedonic. We also construct and compare alternative price indices used either in research or by the federal statistical agencies. Of these the one that seems to work well is a Pasche style hedonic. Its advantage is that since it does not require computation of the current period's hedonic function, it is easier to use when monthly timetables need to be met.

Suggested Citation

Pakes, Ariel, A Reconsideration of Hedonic Price Indices with an Application to Pc's (January 2002). NBER Working Paper No. w8715. Available at SSRN: https://ssrn.com/abstract=297341

Ariel Pakes (Contact Author)

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Harvard University - Department of Economics ( email )

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