NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Aviv Nevo

NBER Working Paper No. 8425
Issued in August 2001
NBER Program(s):   IO   PR

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.

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Document Object Identifier (DOI): 10.3386/w8425

Published: Nevo, Aviv. "New Products, Quality Changes, And Welfare Measures Computed From Estimated Demand Systems," Review of Economics and Statistics, 2003, v85(2,May), 266-275.

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