Hedonic Price Indexes with Unobserved Product Characteristics, and Application to Pc's

Stanford GSB Working Paper No. 1841

Posted: 7 Feb 2004

See all articles by C. Lanier Benkard

C. Lanier Benkard

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Patrick Bajari

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2003

Abstract

We show that hedonic price indexes may be biased when not all product characteristics are observed. We derive two primary sources of bias. The first is a classical selection problem that arises due to changes over time in the values of unobserved characteristics. The second comes from changes in the implicit prices of unobserved characteristics. Next, we show that the bias can be corrected for under fairly general assumptions using extensions of factor analysis methods. We test our methods empirically using a new comprehensive monthly data set for desktop personal computer systems. For this data we find that the standard hedonic index has a slight upward bias of approximately 1.4% per year. We also find that omitting an important characteristic (CPU benchmark) causes a large bias in the index with standard methods, but that this bias is essentially eliminated when the proposed correction is applied.

Keywords: Econometrics, prices indexes, microeconomics

Suggested Citation

Benkard, C. Lanier and Bajari, Patrick, Hedonic Price Indexes with Unobserved Product Characteristics, and Application to Pc's (September 2003). Stanford GSB Working Paper No. 1841, Available at SSRN: https://ssrn.com/abstract=495570

C. Lanier Benkard (Contact Author)

Stanford Graduate School of Business ( email )

Stanford, CA 94305-5015
United States
650-723-4124 (Phone)
650-725-0468 (Fax)

National Bureau of Economic Research (NBER)

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Patrick Bajari

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-763-5319 (Phone)

HOME PAGE: http://www-personal.umich.edu/~bajari/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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