TY  - JOUR
AU  - Benkard,C. Lanier
AU  - Bajari,Patrick
TI  - Hedonic Price Indexes with Unobserved Product Characteristics, and Application to PC's
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9980
PY  - 2003
Y2  - September 2003
UR  - http://www.nber.org/papers/w9980
L1  - http://www.nber.org/papers/w9980.pdf
N1  - Author contact info:
C. Lanier Benkard
Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305
Tel: 650 725-2173
E-Mail: lanierb@stanford.edu

Patrick Bajari
University of Washington
331 Savery Hall
UW Economics Box 353330
Seattle, Washington 98195-3330
E-Mail: Bajari@uw.edu
AB  - We show that hedonic price indexes may be biased when not all product characteristics are observed. We derive two primary sources of bias.  The first is a classical selection problem that arises due to changes over time in the values of unobserved characteristics. The second comes from changes in the implicit prices of unobserved characteristics. Next, we show that the bias can be corrected for under fairly general assumptions using extensions of factor analysis methods. We test our methods empirically using a new comprehensive monthly data set for desktop personal computer systems. For this data we find that the standard hedonic index has a slight upward bias of approximately 1.4\% per year. We also find that omitting an important characteristic (CPU benchmark) causes a large bias in the index with standard methods, but that this bias is essentially eliminated when the proposed correction is applied.
ER  -