Calculating Hedonic Price Indices with Unobserved Product Attributes: An Application to the UK Car Market

24 Pages Posted: 17 Jan 2007

See all articles by Francisco Requena

Francisco Requena

University of Valencia - Department of Applied Economics II

James T. Walker

Henley Business School, University of Reading

Abstract

We show that hedonic price indices that omit model-specific unobservable product attributes are subject to considerable bias. We utilize a complete panel of new car versions marketed in the UK over 1971-98 which incorporates over 100 observable product characteristics, sales weighting to capture the distribution of purchases across models, and model-specific fixed effects to account for unobservable characteristics. We find that quality-adjusted prices obtained from hedonic regressions that do not account for unobservable characteristics exhibit a severe downward bias. We also show that quality-adjusted prices exhibit distinct sub-market differences having increased in mass production segments and decreased in 'specialized niches'.

Suggested Citation

Requena Silvente, Francisco and Walker, James T., Calculating Hedonic Price Indices with Unobserved Product Attributes: An Application to the UK Car Market. Economica, Vol. 73, No. 291, pp. 509-532, August 2006, Available at SSRN: https://ssrn.com/abstract=918580 or http://dx.doi.org/10.1111/j.1468-0335.2006.00504.x

Francisco Requena Silvente (Contact Author)

University of Valencia - Department of Applied Economics II ( email )

Edifici Departamental Oriental
Avda. dels Tarongers, S/N
46022 Valencia
Spain
+34 963 828 353 (Phone)
+34 96 3828 354 (Fax)

HOME PAGE: http://www.uv.es/frequena/

James T. Walker

Henley Business School, University of Reading ( email )

PO Box 218
Reading, Berkshire RG6 6AH
United Kingdom
+44 (0) 118 378 7374 (Phone)

HOME PAGE: http://www.henley.ac.uk/people/person/dr-james-walker/

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