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New Products, Quality Changes and Welfare Measures Computed From Estimated Demand Systems

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Aviv Nevo

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Abstract

This paper examines the construction of a price index based on an estimated demand system. In principle the method examined can produce a price index that accounts for introduction of new products and quality changes in existing products. However, I isolate two key assumptions that have to be made in order to interpret the demand estimates into welfare measures. Using estimates of a brand-level demand system for ready-to-eat cereal I demonstrate the empirical importance of the assumptions. For the data I use, depending on the interpretation of the demand estimates, a price index can range between a 35% percent increase over the five years examined to a 2.4% decrease.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8425.

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Date of creation: Aug 2001
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Handle: RePEc:nbr:nberwo:8425

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-42, March.
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  2. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer. [Downloadable!] (restricted)
  3. Pakes, Ariel & Berry, Steven & Levinsohn, James A, 1993. "Applications and Limitations of Some Recent Advances in Empirical Industrial Organization: Price Indexes and the Analysis of Environmental Change," American Economic Review, American Economic Association, vol. 83(2), pages 241-46, May.
  4. Jerry A. Hausman, 1997. "Valuing the Effect of Regulation on New Services in Telecommunications," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1997-1), pages 1-54. [Downloadable!]
  5. Daniel McFadden, 1996. "Computing Willingness-to-Pay in Random Utility Models," Working Papers _011, University of California at Berkeley, Econometrics Laboratory Software Archive.
  6. Trajtenberg, Manuel, 1989. "The Welfare Analysis of Product Innovations, with an Application to Computed Tomography Scanners," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 444-79, April. [Downloadable!] (restricted)
  7. Gordon, Robert J & Griliches, Zvi, 1997. "Quality Change and New Products," American Economic Review, American Economic Association, vol. 87(2), pages 84-88, May. [Downloadable!] (restricted)
  8. Jerry A. Hausman, 1996. "Valuation of New Goods under Perfect and Imperfect Competition," NBER Chapters, in: The Economics of New Goods, pages 207-248 National Bureau of Economic Research, Inc. [Downloadable!]
  9. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Huffman, Sonya & Ishdorj, Ariun & Jensen, Helen, 2005. "Consumer Choices and Welfare Gains from New, Healthy Products: A Virtual Price Approach," 2005 Annual meeting, July 24-27, Providence, RI 19351, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  2. John K. Dagsvik, Astrid L. Mathiassen and Bengt J.Eriksson, 2006. "Quality adjusted price indexes for discrete goods," Discussion Papers 490, Research Department of Statistics Norway. [Downloadable!]
  3. Kelchtermans, Stijn & Verboven, Frank, 2007. "Reducing Product Diversity in Higher Education," CEPR Discussion Papers 6508, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Kristin Kiesel & Sofia Villas-Boas, 2007. "Got Organic Milk? Consumer Valuations of Milk Labels after the Implementation of the USDA Organic Seal," Journal of Agricultural & Food Industrial Organization, Berkeley Electronic Press, vol. 5(1), pages 1152-1152. [Downloadable!] (restricted)
    Other versions:
  5. Austan Goolsbee & Peter J. Klenow, 2006. "Valuing Consumer Products by the Time Spent Using Them: An Application to the Internet," American Economic Review, American Economic Association, vol. 96(2), pages 108-113, May. [Downloadable!]
    Other versions:
  6. Kristin Kiesel & Sofia Villas-Boas, 2008. "Another Nutritional Label--Experimenting with Grocery Store Shelf Labels and Consumer Choice--," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series 1060, Department of Agricultural & Resource Economics, UC Berkeley. [Downloadable!]
  7. Ariel Pakes, 2003. "A Reconsideration of Hedonic Price Indexes with an Application to PC's," American Economic Review, American Economic Association, vol. 93(5), pages 1578-1596, December. [Downloadable!]
  8. Kim, Donghun, 2004. "Estimation of the Effects of New Brands on Incumbents' Profits and Consumer Welfare: The U.S. Processed Cheese Market Case," Research Reports 25192, University of Connecticut, Food Marketing Policy Center. [Downloadable!]
  9. Brynjolfsson, Erik & Smith, Michael D. & Yu, (Jeffrey) Hu, 2003. "Consumer Surplus in the Digital Economy: Estimating the Value of Increased Product Variety at Online Booksellers," Working papers 4305-03, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  10. Katherine Ho, 2005. "The Welfare Effects of Restricted Hospital Choice in the US Medical Care Market," NBER Working Papers 11819, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. N. Jonker, 2001. "Constructing Quality Adjusted Price Indexes: a Comparison of Hedonic and Discrete Choice Models," WO Research Memoranda (discontinued) 673, Netherlands Central Bank, Research Department. [Downloadable!]
    Other versions:
  12. Campbell Cowie & Sandeep Kapur, 2005. "The Management of Digital Rights in Pay TV," Birkbeck Working Papers in Economics and Finance 0510, Birkbeck, Department of Economics, Mathematics & Statistics. [Downloadable!]
  13. Benkard, C. Lanier & Bajari, Patrick, 2003. "Hedonic Price Indexes with Unobserved Product Characteristics, and Application to PC's," Research Papers 1841, Stanford University, Graduate School of Business. [Downloadable!]
  14. Nilsson, Tomas & Foster, Ken, 2005. "Certification of Pork Products," 2005 Annual meeting, July 24-27, Providence, RI 19350, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  15. Mitsuru Sunada, 2005. "Welfare effects of quality change and new products in the Japanese mobile telecommunications market: 1995--2001," Economics of Innovation and New Technology, Taylor and Francis Journals, vol. 14(8), pages 715-733, November. [Downloadable!] (restricted)
  16. Banzhaf, H. Spencer, 2002. "Quality Adjustment for Spatially-Delineated Public Goods: Theory and Application to Cost-of-Living Indices in Los Angeles," Discussion Papers dp-02-10-, Resources For the Future. [Downloadable!]
  17. Smith, V. Kerry & Banzhaf, H. Spencer, 2003. "Meta Analysis in Model Implementation: Choice Sets and the Valuation of Air Quality Improvements," Discussion Papers dp-03-61, Resources For the Future. [Downloadable!]
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  18. Laura Blow, 2004. "Valuing a new good," IFS Working Papers W04/03, Institute for Fiscal Studies. [Downloadable!]
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