Overview: This paper explores the extent to which goods follow systematic pricing patterns
over their life cycle. The theoretical literature, and anecdotal evidence, suggests that
new products are often introduced at high prices which decline as the good ages while, older
goods exit the market at a discount. We outline and apply a smoothing-spline approach
to the estimation of life cycle pricing effects using data on two different types of goods;
supermarket products (beer, canned soup and cereals) and high-tech goods (desktop and
laptop computers, and personal digital assistants). We find evidence for the existence of
large life cycle pricing effects though there is some heterogeneity across products. The existence
of life cycle effects on prices has important implications for the estimation of inflation.
If prices change due to life cycle factors then this needs to be accounted for in estimating an
index. Using our pricing function, we show that significant bias can arise from the failure
to accurately represent the age structure of sampled products.
Tags: PLC, Pricing, Hedonic Regression; Price Index; Spline
Smoothing.
Format: PDF | Size: 238 KB
Source: Monash University
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