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December 1996Keywords: price indexes, hedonic methods, technical change
AbstractChanging product quality poses a challenge for the computation of price indexes, in particular in technologically advanced industries. We assess the differences between traditional and quality-corrected indexes by computing hedonic and matched-model price indexes for personal computer database software. Our database covers the price development in Germany from 1986 to 1994. Quality-adjusted software prices decline by 7.4 percent according to our hedonic index. Surprisingly, a matchedmodel index based on linking the prices of directly comparable program versions decreases even faster than the hedonic index (9.3 percent). This unusual result is apparently caused by the simultaneous selling of old and new versions of a given software product. The estimation results also confirm the importance of network effects. Code compatibility, i.e. the capability of executing programs written for the dominant database product, yields a significant price premium. The ability to read and write data in the dominant spreadsheet format (file compatibility) is also associated with higher prices, but the price differential is much smaller than in the 2 case of code compatibility.
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Non-Technical SummaryThe computation of price indexes is often considered a rather mundane and boring task in economics. Yet, given the importance that is attached to the use of price indexes in economic policy decision-making, it is obviously an important one. In the context of goods with changing product quality, it can often be a complex task, too, since it is difficult to seperate quality changes from the pure time component in price series. To study the implications of various methods used in the computation of price indexes, this paper presents empirical evidence for a rather narrowly defined group of software products: PC-based database software. We consider several types of indexes in this paper and explore how the results are affected by changes in the computations.Our database covers the price development in Germany from 1986 to 1994. Qualityadjusted software prices decline by 7.4 percent according to our hedonic index. Surprisingly, a matched-model index based on linking the prices of directly comparable program versions decreases even faster than the hedonic index (9.3 percent). This is an unusual result, since most previous studies find that matchedmodel indexes typically understa...
Changing product quality, rapid technological progress, and short product life cycles make it difficult to compute indices that correctly reflect the true price movements of IT products. This paper assesses the differences between traditional and quality adjusted indices by providing results for PC hardware. Transaction price data for the period from 1985 to 1994 are used to construct price indices for personal computers in Germany.The use of hedonic methods allows to correct for quality changes. Quality-adjusted hardware prices decline by 34 percent on average per year according to our hedonic index. The estimation confirms the importance of quality adjustment since the decline of average prices at 7 percent p.a. is substantially lower, thus overestimating computer prices and inflation.When the hedonic index for German computer prices is compared to various indices calculated for the US market it seems that the decline of quality adjusted prices in Germany has been significantly higher than in the US. However if prices are converted to US$ the average decline is about 30 percent which is consistent with results for the US.
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