Producer Price Index Manual: Theory and Practice ... - METAC

Producer Price Index Manual
E.4 Hedonic approach
E.4.1 Principles and method
7.126 The hedonic approach is an extension of
the two preceding approaches. First, the change in
price arising from a unit change in quality—the
slope of the line in Figure 7.1—is now estimated
from a data set comprising prices and quality characteristic
values of a larger number of varieties.
Second, the quality characteristic set is extended to
cover, in principle, all major characteristics that
might influence price, rather than just the quantity
or option adjustment. The theoretical basis for hedonic
regressions will be covered in Chapter 21
and is briefly reviewed after the following example.
7.127 First, it should be noted that the method
requires an extension of the data set to include values
for each product of price-determining quality
characteristics. Under the matched models method,
each respondent needed to supply sufficient data
on each item to allow it to be identified for subsequent
repricing. The extension required is that all
price-determining characteristics should be available
for each item. Checklists for the characteristics
of a product have been found by Merkle
(2000) to improve the quality of data collected, as
well as to serve the needs of hedonic adjustments
(see also Chapter 6 on price collection and Liegey,
1994). If a product is missing, any difference in the
characteristics of its replacement can be identified,
and, as will be shown, a valuation can be ascribed
to such differences using the hedonic approach.
Appendix 7.1 provides data taken from the
U.K. Compaq and Dell websites in July 2000 on
the prices and characteristics of 64 desktop PCs.
Figure 7.2 is a scatter diagram constructed from
these data relating the price (£) to the processing
speed (MHz). It is apparent that PCs with higher
speeds command higher prices—a positive relationship.
Under the option cost framework described
above, a switch from a 733 MHz PC to a
933 MHz one would involve a measure of the
slope of the line between two unique points. The
approach requires that there are 733 MHz and 933
MHz PCs that are otherwise identical. From Figure
7.2 and Appendix 7.1, it is apparent that in each
instance there are several PCs with the same speed
but different prices, owing to differences in other
things. To estimate the required value given to additional
units of speed, an estimate of the slope of
the line that best fits the data is required. In Figure
7.1, the actual slope was used; for the data in Figure
7.2, an estimate of the slope needs to be de
rived from an estimate of the equation of the line
that best fits the data, using ordinary least squares
Figure 7.2. Scatter Diagram
3,500
Price, £s sterling
3,000
2,500
2,000
1,500
1,000
500
0
0 200 400 600 800 1000 1200
Speed, MHz
171