Constructing a Quality-Adjusted Price Index for a Heterogeneous Oligopoly

20 Pages Posted: 30 Jun 2004

See all articles by David Prentice

David Prentice

Infrastructure Victoria

Xiangkang Yin

Deakin University; Financial Research Network (FIRN)

Abstract

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 analyze 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.

Suggested Citation

Prentice, David and Yin, Xiangkang, Constructing a Quality-Adjusted Price Index for a Heterogeneous Oligopoly. Manchester School, Vol. 72, No. 4, pp. 423-442, July 2004. Available at SSRN: https://ssrn.com/abstract=558887

David Prentice

Infrastructure Victoria ( email )

530 Collins St
Melbourne, 3000
Australia

Xiangkang Yin

Deakin University ( email )

Melbourne, Victoria
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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