Constructing Quality-Adjusted Price Index for a Hetrogeneous Oligopoly
29 Pages Posted: 9 Sep 2003
Date Written: June 2003
Both the theory and practice of using hedonic regressions to remove quality effects in price indexes are implicitly developed for monopolistic competitive markets. In this paper, we theoretically and practically analyse the application of a standard hedonic regression for an oligopoly. In the theoretical work, we recast how for an oligopoly the standard hedonic regression may be unstable. Then in the empirical work, we recommend using the weighted imputation method for constructing an index and estimating separate hedonic regressions for market segments. We apply these recommendations to estimating a quality-adjusted price index for the Australian passenger vehicle market and find they make a substantial difference.
Keywords: Quality Adjustment, Price Index, Automobile Industry, Oligopoly
JEL Classification: C51, D43, L62
Suggested Citation: Suggested Citation