New Characteristics and Hedonic Price Index Numbers

In this paper we argue that changes in product characteristics on the extensive margin (the range of product features) can be important and that to neglect them will lead to an economically and statistically significant bias... [ view full abstract ]

In this paper we argue that changes in product characteristics on the extensive margin (the range of product features) can be important and that to neglect them will lead to an economically and statistically significant bias to quality-adjusted (hedonic) price indices. We describe a simple method for incorporating changes on the extensive characteristic margin and illustrate the effect of doing so using data on new car sales in the UK. The method we explore is one which National Statistical Institutes could easily adopt since it requires no additional estimation steps over-and-above those normally required for the construction of hedonic price indices.