Price Measurement Using Scanner Data: Time‐Product Dummy Versus Time Dummy Hedonic Indexes

Jan de Haan, Rens Hendriks and Michael Scholz

Review of Income and Wealth, 2021, vol. 67, issue 2, 394-417

Abstract: This paper compares two model‐based multilateral price indexes: the time‐product dummy (TPD) index and the time dummy hedonic (TDH) index, both estimated by expenditure‐share weighted least squares regression. The TPD model can be viewed as the saturated version of the underlying TDH model, and we argue that the regression residuals are “distorted toward zero” due to overfitting. We decompose the ratio of the two indexes in terms of average regression residuals of the new and disappearing items. The decomposition aims to explain the conditions under which the TPD index suffers from quality‐change bias or, more generally, lack‐of‐matching bias. An example using scanner data on packaged men's T‐shirts illustrates our framework.

Date: 2021
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