![]() ![]() In the table above two models are highlighted, Kangaroo and Echidna, to show how their prices have changed over the period. Because models typically have fewer quality changes than the market as a whole, and that they typically represent a segment of the market (budget or premium), compiling prices over time for the same model can give a reasonable measure of price changes for similar quality products. The reason to include models is that one method for determining price changes is called the model-matching technique. For car markets, it could be Corolla, Landcruiser and so on, or for computers, Dell Latitude, Apple MacBook or any other model. This hypothetical market could be computers, cars, or any other market where quality changes noticeably over time. The above table has been constructed to show how different methods for determining price changes can produce significantly different results. Buyers of cheaper products will not see the price declines measured by a hedonic index, and may even see price increases. Quality improvement does not imply that prices faced by consumers have dropped, especially if lower quality goods are no longer available. Today I want to further elaborate upon, and demonstrate using the table below, what I call the lower bound problem of hedonic price indices. ![]() One issue that attracts little attention is how to interpret and apply results from hedonic price index calculations. While a hedonic index is a useful tool, and when part of a package of price indices can clarify our understanding of price and quality movements, many unresolved issues persist. I apologise for raising this issue again, but I hope to clarify my message with an example. I have previously discussed the use of hedonic price indices, where adjustments are made for quality changes using regression techniques, and the potential pitfalls when interpreting the results of this method. Prices are a fundamental feature of modern economies, yet measuring a true price change is exceedingly difficult due to the constantly changing quality of goods and services.
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