Advertisement

Valuing the quantity and quality of product variety to consumers

  • Daniel Melser
Article
  • 37 Downloads

Abstract

This paper presents a new decomposition of the cost of living into price, variety-quality and variety-quantity components. Variety-quantity reflects the value to consumers of an increase in the number of products, while variety-quality measures the average attractiveness of new versus disappearing products. The decomposition is relevant to calculation of the CPI and understanding firms’ product development practices. Our empirical results, using a large US scanner data set, show that variety-quality change is the most important component of variety improvement. This reduced the cost of living by 1.34 percentage points per annum on average, while variety-quantity lowered it by 0.67 percentage points.

Keywords

Scanner data Consumer Price Index (CPI) Quality change New goods Multilateral indexes CES 

JEL Classification

C43 D12 031 

Supplementary material

181_2018_1532_MOESM1_ESM.pdf (71 kb)
Supplementary material 1 (pdf 71 KB)

References

  1. Ackerberg D, Rysman M (2005) Unobserved product differentiation in discrete-choice models: estimating price elasticities and welfare effects. RAND J Econ 36(4):771–788Google Scholar
  2. Balk B (2000) On curing the CPI’s substitution and new goods bias, Discussion paperGoogle Scholar
  3. BLS (2017) Hedonic quality adjustment in the CPI. https://www.bls.gov/cpi/quality-adjustment/home.htm. Accessed 10 Oct 2017
  4. Bresnahan TF (1997) The apple-cinnamon cheerios war: valuing new goods, identifying market power, and economic measurement. www.web.stanford.edu/~tbres/Unpublished_Papers/hausman%20recomment.pdf. Accessed 10 Oct 2017
  5. Bresnahan TE, Gordon RJ (eds) (1996) The economics of new goods NBER studies in income and wealth, vol 58. he University of Chicago Press, ChicagoGoogle Scholar
  6. Broda C, Weinstein DE (2006) Globalization and the gains from variety. Q J Econ 121(2):541–585CrossRefGoogle Scholar
  7. Broda C, Weinstein DE (2010) Product creation and destruction: evidence and price implications. Am Econ Rev 100(3):691–723CrossRefGoogle Scholar
  8. Bronnenberg BJ, Kruger M, Mela CF (2008) The IRI marketing data set. Market Sci 27(4):745–748CrossRefGoogle Scholar
  9. de Haan J, van der Grient HA (2011) Eliminating chain drift in price indexes based on scanner data. J Economet 161(1):36–46CrossRefGoogle Scholar
  10. Diewert WE (1976) Exact and superlative index numbers. J Economet 4(2):115–145CrossRefGoogle Scholar
  11. Diewert WE (1978) Superlative index numbers and consistency in aggregation. Econometrica 46(4):883–900CrossRefGoogle Scholar
  12. Feenstra R (1994) New product varieties and the measurement of international prices. Am Econ Rev 84(1):157–177Google Scholar
  13. Feenstra RC (2010) Product variety and the gains from international trade. MIT Press, CambridgeCrossRefGoogle Scholar
  14. Feenstra RC, Markusen JR (1994) Accounting for growth with new inputs. Int Econ Rev 35(2):429–447CrossRefGoogle Scholar
  15. Gini C (1931) On the circular test of index numbers. Metron 9(9):3–24Google Scholar
  16. Groshen EL, Moyer BC, Aizcorbe AM, Bradley R, Friedman DM (2017) How government statistics adjust for potential biases from quality change and new goods in an age of digital technologies: a view from the trenches. J Econ Perspect 31(2):187–210CrossRefGoogle Scholar
  17. Hardy GH, Littlewood JE, Polya G (1934) Inequalities. Cambridge University Press, CambridgeGoogle Scholar
  18. ILO (2004) Consumer Price Index manual: theory and practice, Produced by: ILO/IMF/OECD/UNECE/Eurostat/The World Bank, GenevaGoogle Scholar
  19. Ivancic L, Diewert EW, Fox KJ (2011) Scanner data, time aggregation and the construction of price indexes. J Economet 161(1):24–35CrossRefGoogle Scholar
  20. Melser D (2006) Accounting for the effects of new and disappearing goods using scanner data. Rev Income Wealth 52(4):547–568CrossRefGoogle Scholar
  21. Melser D (2017) Scanner data price indexes: addressing some unresolved issues. J Bus Econ Stat 36(3):516–522CrossRefGoogle Scholar
  22. Melser D, Syed IA (2016) Life cycle price trends and product replacement: implications for the measurement of inflation. Rev Income Wealth 62(3):509–533CrossRefGoogle Scholar
  23. Melser D, Syed IA (2017) The product life cycle and sample representativity bias in price indexes. Appl Econ 49(6):573–586CrossRefGoogle Scholar
  24. Melser D, Webster M (2017) Multilateral methods, substitution bias and chain drift: an empirical note, Discussion paperGoogle Scholar
  25. Nielsen (2015) Breakthrough innovation report 2015—Europe edition. http://innovation.nielsen.com/breakthrough2015EU
  26. Rao DSP (2001) Weighted EKS and generalized CPD methods for aggregation at the basic heading level and above basic heading level, In: Joint World Bank - OECD Seminar on Purchasing Power Parities, Recent Advances in Methods and Applications, Washington D.CGoogle Scholar
  27. Redding SJ, Weinstein DE (2017) A unified approach to estimating demand and welfare, NBER working paper no. 22479Google Scholar
  28. Sato K (1976) The ideal log-change index number. Rev Econ Stat 58(2):223–28CrossRefGoogle Scholar
  29. Schultze CL, Mackie C (eds) (2002) At what price?: conceptualizing and measuring cost-of-living and price indexes. National Academy Press, Washington, D.CGoogle Scholar
  30. Sheu G (2014) Price, quality and variety: measuring the gains from trade in differentiated products. Am Econ J Appl Econ 6(4):66–89CrossRefGoogle Scholar
  31. Szulc B (1964) Indices for multiregional comparisons. Przeglad Statystyczny 3:239254 [in Polish]Google Scholar
  32. Vartia Y (1976) Ideal log-change index numbers. Scand J Stat 3(3):121–26Google Scholar
  33. Wells J, Restieaux A (2014) Review of hedonic quality adjustment in UK consumer price statistics and internationally, Office for National Statistics, UKGoogle Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of Econometrics and Business StatisticsMonash UniversityClayton, MelbourneAustralia

Personalised recommendations