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

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  • FRANCISCO REQUENA‐SILVENTE
  • JAMES WALKER

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

  • Francisco Requena‐Silvente & James Walker, 2006. "Calculating Hedonic Price Indices with Unobserved Product Attributes: An Application to the UK Car Market," Economica, London School of Economics and Political Science, vol. 73(291), pages 509-532, August.
    • Handle: RePEc:bla:econom:v:73:y:2006:i:291:p:509-532
    DOI: 10.1111/j.1468-0335.2006.00504.x
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    References listed on IDEAS

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    1. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    2. 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.
    3. C. Lanier Benkard & Patrick Bajari, 2003. "Hedonic Price Indexes with Unobserved Product Characteristics, and Application to PC's," NBER Working Papers 9980, National Bureau of Economic Research, Inc.
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    Cited by:

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    2. Ana Isabel Guerra Hernández, 2007. "Effects of Competition over Quality-Adjusted Price Indexes: An Application to the Spanish Automobile Market," Working Papers wpdea0707, Department of Applied Economics at Universitat Autonoma of Barcelona.
    3. Xiandeng Jiang & Zheng Pan & Ningru Zhao, 2023. "Relative Value vs Absolute Value: Housing Wealth and Labor Supply," The Journal of Real Estate Finance and Economics, Springer, vol. 66(1), pages 41-76, January.
    4. Xosé-Luís Varela-Irimia, 2014. "Age effects, unobserved characteristics and hedonic price indexes: The Spanish car market in the 1990s," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 5(4), pages 419-455, November.
    5. OTA Rui & ZHANG Lili, 2020. "Declining Demand and Product Quality: An Empirical Study of the Japanese PC Monitor Market," Discussion papers 20033, Research Institute of Economy, Trade and Industry (RIETI).
    6. Waseem AHMAD* & Tanvir AHMED** & Bashir AHMAD***, 2017. "HEDONIC PRICING OF MILK AT RETAIL LEVEL: A Case of Faisalabad, Pakistan," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 27(1), pages 29-39.
    7. Knittel, Christopher R., 2009. "Automobiles on Steroids: Product Attribute Trade-O�s and Technological Progress in the Automobile Sector," Institute of Transportation Studies, Working Paper Series qt2nt1r1x1, Institute of Transportation Studies, UC Davis.
    8. Naoki Watanabe & Ryo Nakajima & Takanori Ida, 2010. "Quality-Adjusted Prices of Japanese Mobile Phone Handsets and Carriers’ Strategies," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 36(4), pages 391-412, June.
    9. Paul Windrum & Koen Frenken & Lawrence Green, 2017. "The importance of ergonomic design in product innovation. Lessons from the development of the portable computer," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 26(6), pages 953-971.

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