HEDONICS AND COMPUTER PRICES
The capabilities and effective prices of computers change rapidly. For example, according to a report by the US Bureau of Labour Statistics, the power of a typical desktop computer increased by about fifteen times between 1993 and 1998, but the market price remained almost unchanged. During the same period, many more features (such high resolution displays and onboard sound cards) were added. Price statisticians want to measure the changing prices of computers, taking such quality changes into account.
In late 2000, Economic Accounts Division and Analytical Services Branch (ASB) began a joint research project to develop a computer price index based on so-called "hedonic methods". The project had two aims: developing a hedonic function based on Australian data; and using that function to construct a price index.
Conventionally, price statisticians have used the "matched sample method" to deal with changes in goods on the market. Thus, if an item that was priced last quarter is no longer available, it is replaced by an item with similar characteristics and quality. If the price collectors are unable to find a perfect substitute, an adjustment is made to reflect the difference in characteristics and quality. It is difficult to apply the matched sample method when many characteristics of a good are changing rapidly and simultaneously. This is particularly true of computers and other high technology products.
An alternative approach is to use the hedonic method. This involves three steps:
- Choosing characteristics of the good which encapsulate its "quality". In the case of computers, the characteristics may include processor speed, the amount of memory, the capacity of the hard disk, and so on.
- Estimating implicit prices of the characteristics based on a large sample of computer models. This is usually done using regression modelling.
- Using the implicit prices of the characteristics to adjust for quality change.
The hedonics project team is led by Richard McKenzie from Producer Price Indexes Section (PPI). Poh Ping Lim (ASB), the chief analyst, has estimated hedonic functions for desktop and notebook computers. PPI Section will now use the estimated functions to construct experimental quality-adjusted price indexes.
For more information, please contact Ms Poh Ping Lim on (02) 6252 7271.
Email: poh.ping.lim@abs.gov.au
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