Abstract
Index number theory informs us that if data on matched prices and quantities are available, a superlative index number formula is best to aggregate heterogeneous items, and a unit value index to aggregate homogeneous ones. The formulas can give very different results. Neglected is the practical case of broadly comparable items, for which price dispersion can be decomposed into a quality component, say due to product differentiation, and a component that is stochastic or due to price discrimination. This paper analyses why such formulas differ and proposes a solution to this index number problem. JEL Classification Numbers: C43, C81, E31, L11, L15.
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