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Price Index Concepts and Measurement$
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W. Diewert, John Greenlees, and Charles R. Hulten

Print publication date: 2010

Print ISBN-13: 9780226148557

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226148571.001.0001

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Reassessing the U.S. Quality Adjustment to Computer Prices

Reassessing the U.S. Quality Adjustment to Computer Prices

The Role of Durability and Changing Software

(p.129) 3 Reassessing the U.S. Quality Adjustment to Computer Prices
Price Index Concepts and Measurement
Robert C. Feenstra, Christopher R. Knittel
University of Chicago Press

This chapter, which provides a new reason for why conventional hedonic methods may overstate the price decline of personal computers, treats computers as a durable good and assumes that, as software changes over time, this influences the efficiency of a computer. Anticipating the future increases in software, purchasers may “overbuy” characteristics, in the sense that the purchased bundle of characteristics is not fully utilized in the first months or year that a computer is owned. The authors develop a model in which the production function for the services of a personal computer depends not only on its vector of characteristics but also on a vector of other (complementary) inputs, and they develop bounds on a constant quality price index that do not depend on being able to observe the vector of complementary inputs.

Keywords:   hedonic methods, personal computers, overbuy, price index, durable good, complementary inputs

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