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A price index with variable mark-ups and changing variety

Author

Listed:
  • Thomas Demuynck

    (ECARES, Université libre de Bruxelles)

  • Mathieu Parenti

    (ECARES, Université libre de Bruxelles and CEPR)

Abstract

This paper proposes an estimation of an augmented Tornqvist price-index - fea- turing demand shifters - which is exact for homothetic translog preferences. Contrary to previous work based on a constant elasticity of substitution across varieties, this demand system allows for changes in markups even when the number of products is large. We then propose a structural decomposition of this index in terms of changes in markups, productivity, variety and demand shocks. We illustrate our approach using sample data from ACNielsens Homescan Panel. For instance, our results are consistent with competition effects where a decrease in per-product demand trans- lates into lower markups.

Suggested Citation

  • Thomas Demuynck & Mathieu Parenti, 2018. "A price index with variable mark-ups and changing variety," Working Paper Research 356, National Bank of Belgium.
    • Handle: RePEc:nbb:reswpp:201810-356
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    References listed on IDEAS

    as
    1. Jean Imbs & Isabelle Mejean, 2015. "Elasticity Optimism," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(3), pages 43-83, July.
    2. Feenstra, Robert C., 2003. "A homothetic utility function for monopolistic competition models, without constant price elasticity," Economics Letters, Elsevier, vol. 78(1), pages 79-86, January.
    3. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-177, March.
    4. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
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