Time Dummy Hedonic and Quality-Adjusted Unit Value Indexes

Abstract

One of the main approaches to constructing quality-adjusted price indexes is the time dummy hedonic method. An alternative but rather unconventional method is the estimation of quality-adjusted unit value indexes. An advantage of the latter method is the interpretation of the implicit quantity index as the simple ratio of quality-adjusted or standardized quantities. In this paper we compare the two methods. We show that the expenditure-share weighted time dummy price index and the quality-adjusted unit value index can be written as ratios of weighted geometric and harmonic means, respectively, of quality-adjusted prices. Next, we argue that the two indexes will have similar trends and volatility if the quality-adjusted prices in the quality-adjusted unit value index are based on the estimated time dummy model. Our theoretical findings are illustrated on New Zealand scanner data for seven consumer electronics products.