Repeat Purchase amid Rapid Quality Improvement: Structural Estimation of Demand for Personal Computers

Jeffrey Prince

Journal of Economics & Management Strategy, 2008, vol. 17, issue 1, 1-33

Abstract: This paper estimates a structural model of demand for the personal computer (PC) by repeat purchasers. Taking advantage of a large data set on household‐level PC purchases, the econometric model uses variation in PC holdings among PC owners to identify households' marginal values of quality improvements. The analysis only requires data on a cross‐section of households along with observed PC offerings over time, and accounts for stock effects, forward‐looking behavior, and large amounts of household heterogeneity. The estimates allow us to measure sensitivity to long‐term and short‐term price and technology changes, as well as consumer welfare changes from technological improvements. The results show a large variation in marginal values for PC quality across households, and that failing to account for forward‐looking behavior results in biased estimates and a poorer fit to the data. Incorporating stock effects proves especially important because, for the data used here, the model's parameters are not only biased but also virtually impossible to pin down without them. The results also show that price elasticity is approximately 25% higher in the short term compared to the long term, and technology elasticity is approximately 35% higher in the short term compared to the long term. Furthermore, welfare measurements are significantly underestimated when using a model that does not account for forward‐looking behavior. Finally, the model is extended to include first‐time purchasers. The results show similar patterns, but should be interpreted with much caution owing to the likely presence of significant unobserved heterogeneity between new purchasers and repeat purchasers.

Date: 2008
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