New Products, Quality Changes and Welfare Measures Computed from Estimated Demand Systems

27 Pages Posted: 14 Aug 2001 Last revised: 23 Oct 2010

See all articles by Aviv Nevo

Aviv Nevo

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 2001

Abstract

This paper examines the construction of a price index based on an estimated demand system. In principle the method examined can produce a price index that accounts for introduction of new products and quality changes in existing products. However, I isolate two key assumptions that have to be made in order to interpret the demand estimates into welfare measures. Using estimates of a brand-level demand system for ready-to-eat cereal I demonstrate the empirical importance of the assumptions. For the data I use, depending on the interpretation of the demand estimates, a price index can range between a 35% percent increase over the five years examined to a 2.4% decrease.

Suggested Citation

Nevo, Aviv, New Products, Quality Changes and Welfare Measures Computed from Estimated Demand Systems (August 2001). NBER Working Paper No. w8425, Available at SSRN: https://ssrn.com/abstract=279712

Aviv Nevo (Contact Author)

Northwestern University - Department of Economics ( email )

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United States

National Bureau of Economic Research (NBER)

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