Re-Assessing the U.S. Quality Adjustment to Computer Prices: The Role of Durability and Changing Software

Christopher Knittel and Robert Feenstra

No 76, Working Papers from University of California, Davis, Department of Economics

Abstract: In the second-half of the 1990s, the positive impact of information technologyon productivity growth for the United States became apparent. The measurement of thisproductivity improvement depends on hedonic procedures adopted by the Bureau ofLabor Statistics (BLS) and Bureau of Economic Analysis (BEA). In this paper wesuggest a new reason why conventional hedonic methods may overstate the price declineof personal computers. We model computers as a durable good and suppose thatsoftware changes over time, which influences the efficiency of a computer. Anticipatingfuture increases in software, purchasers may ?overbuy? characteristics, in the sense thatthe purchased bundle of characteristics is not fully utilized in the first months or year thata computer is owned. In this case, we argue that hedonic procedures do not provide validbounds on the true price of computer services at the time the machine is purchased withthe concurrent level of software. To assess these theoretical results we estimate themodel and find that before 2000 the hedonic price index constructed with BLS methodsoverstates the fall in computer prices. After 2000, however, the BLS hedonic index fallsmore slowly, reflecting the reduced marginal cost of acquiring (and therefore marginalbenefit to users) of characteristics such as RAM, hard disk space or speed.

Keywords: industrial (search for similar items in EconPapers)
JEL-codes: D2 E3 L6 (search for similar items in EconPapers)
Pages: 50
Date: 2006-11-15
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Related works:
Chapter: Reassessing the US Quality Adjustment to Computer Prices: The Role of Durability and Changing Software (2009)
Working Paper: Re-Assessing the U.S. Quality Adjustment to Computer Prices: The Role of Durability and Changing Software (2004)
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