Estimating the Benefits of New Products

66 Pages Posted: 26 Jun 2019 Last revised: 9 Jul 2023

See all articles by Erwin Diewert

Erwin Diewert

University of British Columbia (UBC)

Robert C. Feenstra

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

Date Written: June 2019

Abstract

A major challenge facing statistical agencies is the problem of adjusting price and quantity indexes for changes in the availability of commodities. This problem arises in the scanner data context as products in a commodity stratum appear and disappear in retail outlets. Hicks suggested a reservation price methodology for dealing with this problem in the context of the economic approach to index number theory. Hausman used a linear approximation to the demand curve to compute the reservation price, while Feenstra used a reservation price of infinity for a CES demand curve, which will lead to higher gains. The present paper evaluates these approaches, comparing the CES gains to those obtained using a quadratic utility function using scanner data on frozen juice products. We find that the CES gains from new frozen juice products are about five times greater than those obtained using the quadratic utility function.

Suggested Citation

Diewert, Erwin and Feenstra, Robert C., Estimating the Benefits of New Products (June 2019). NBER Working Paper No. w25991, Available at SSRN: https://ssrn.com/abstract=3408925

Erwin Diewert (Contact Author)

University of British Columbia (UBC) ( email )

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Robert C. Feenstra

University of California, Davis - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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