Quality-corrected price indices: the case of the Dutch new passenger car market, 1990-1999

Market dynamics and technological developments constitute a major challenge to the proper measurement of the price evolution of durable goods. In this study, hedonic methods are used to estimate quality-corrected price indices of new passenger cars in the Netherlands, 1990-1999. Use is made of a huge set of price, quantity and quality information about 11,000 car models, obtained from different sources. During the observation period the nominal price level of all available car models increased about 20% on average, while the shares of car models with airbags, tinted glass and power steering increased from almost nothing to about 90%. Matched model price indices and the official CPI for new passenger cars, which partially account for quality-adjustments, estimate the price increase to be equal to 10.6-14.2% respectively 11.2% for the 1990-1999 period. By contrast, the hedonic Fisher-like price indices based on the preferred annually estimated brand-weighted semi-log hedonic model, lead to price changes varying from + 2.3% to - 3.4% (depending on the choice of weight variable, and the use of fixed or varying reference periods in the index construction) and thereby fall 8.9 to 14.6 percentage points below the official figures, over the period 1990-1999. The pooled adjacent-years model holds an intermediate position with a predicted quality-corrected price decrease of 1.8% over the observation period, which is 13.0 points below the CPI.