Pricing Patterns over Product Life-Cycle and Quality Growth at Product Turnover: Empirical Evidence from Japan

Nobuhiro Abe, Yojiro Ito, Ko Munakata, Shinsuke Ohyama and Kimiaki Shinozaki
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Nobuhiro Abe: Bank of Japan
Yojiro Ito: Bank of Japan
Ko Munakata: Bank of Japan
Shinsuke Ohyama: Bank of Japan
Kimiaki Shinozaki: Bank of Japan

No 16-E-5, Bank of Japan Working Paper Series from Bank of Japan

Abstract: This paper examines pricing patterns over the product life-cycle and quality growth at the time of product turnover regarding a wide range of durable consumer goods sold in Japan. Applying hedonic regressions with time dummies to large granular data sets obtained from Kakaku.com, the most popular price comparison website in Japan, we find out that sellers tend to raise product prices more than those justified by quality improvements to ensure the profitability at product turnover. A glance at the pricing patterns reveals that the prices of new products decrease gradually with the elapse of time, however, the pace of falling in prices varies considerably among commodities. The quality improvement ratio, which measures the contribution of quality growth to the price difference between matched pair of a new product and an old one by commodities, exhibits a unimodal distribution slightly fat-tailed to the right. The mode value of the distribution is about 0.5-0.6 for home electrical appliances and about 0.6-0.7 for digital consumer electronics. Those results provide an empirical support to the existing quality adjustment method in the field of the price index, so-called 50% rule, which has been implemented by some statistical agencies. Our findings bring significant implications for improving quality adjustment methods under uncertainty of quality evaluation and lead to the better understanding of the firms' price setting behavior.

Keywords: price index; quality adjustment; price setting; hedonic approach (search for similar items in EconPapers)
JEL-codes: C43 D22 L15 (search for similar items in EconPapers)
Date: 2016-06-14
New Economics Papers: this item is included in nep-com, nep-mkt and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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