DP13445 New Characteristics and Hedonic Price Index Numbers

Author(s): Ian Crawford, J Peter Neary
Publication Date: January 2019
Date Revised: January 2019
Keyword(s): Characteristics Model, Extensive and Intensive Margins of Consumption, Quality Change, Sato-Vartia-Feenstra Index Numbers
JEL(s): C90, C91, C92, D03
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13445

Changes in product characteristics on the extensive margin are an important and hitherto neglected dimension of quality change. Standard techniques for quality-adjusting price indices cannot handle such changes satisfactorily, which leads to an economically and statistically significant bias in the measurement of prices and real output. We combine theoretical insights from index numbers and demand for characteristics to develop a new method for incorporating changes on the extensive characteristic margin. Applied to data on new car sales in the U.K., our method leads to revisions in estimated inflation rates for this commodity group that are both plausible and quantitatively important.