Product Turnover and Deflation: Evidence from Japan

Kozo Ueda, Kota Watanabe and Tsutomu Watanabe
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Kota Watanabe: Canon Institute for Global Studies and University of Tokyo
Tsutomu Watanabe: University of Tokyo

No 73, UTokyo Price Project Working Paper Series from University of Tokyo, Graduate School of Economics

Abstract: In this study, we evaluate the effects of product turnover on a welfare-based cost-of-living index. We first present several facts about price and quantity changes over the product cycle employing scanner data for Japan for the years 1988-2013, which cover the deflationary period that started in the mid 1990s. We then develop a new method to decompose price changes at the time of product turnover into those due to the quality effect and those due to the fashion effect (i.e., the higher demand for products that are new). Our main findings are as follows: (i) the price and quantity of a new product tend to be higher than those of its predecessor at its exit from the market, implying that Japanese firms use new products as an opportunity to take back the price decline that occurred during the life of its predecessor under deflation; (ii) a considerable fashion effect exists, while the quality effect is slightly declining; and (iii) the discrepancy between the cost-of- living index estimated based on our methodology and the price index constructed only from a matched sample is not large. Our study provides a plausible story to explain why Japan's deflation during the lost decades was mild.

Keywords: cost-of-living index; product creation and destruction; fashion effect; substitution; lost decades (search for similar items in EconPapers)
JEL-codes: C43 E31 E32 O31 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2016-12
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Product Turnover and Deflation: Evidence from Japan (2016)
Working Paper: Product turnover and deflation: Evidence from Japan (2016)
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