American Economic Review: Vol. 93 No. 5 (December 2003)
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A Reconsideration of Hedonic Price Indexes with an Application to PC's
Pakes, Ariel. 2003. "A Reconsideration of Hedonic Price Indexes with an Application to PC's." American Economic Review, 93(5): 1578-1596.
This paper compares hedonic to matched model indexes. Matched model indexes are averages of the price changes of goods that remain on sampled stores' shelves. Since goods that disappear tend to have falling market values, matched model indexes select from the right tail of price changes. The BLS can construct hedonic indexes that correct for this selection and are justified by standard arguments. In an empirical study of PC's hedonics produce sharp price declines while matched model indexes are near zero. Also, though there are modifications to hedonics that seem desirable, they are not those in current use.
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