Automobiles and Hedonic Quality Measurement

Abstract

Are price indexes biased upward because of quality change? One of the few pieces of firm evidence on this question is the study by Zvi Griliches (1961, 1964), who concluded that almost all of the recorded rise in the new automobile component of the Consumer Price Index (CPI) between 1954 and 1960 could be attributed to substantial improvement in the quality of automobiles. In view of the ubiquity of the quality problem in index number construction and the paucity of knowledge on the nature and extent of quality change, it is not surprising that Griliches' findings have been cited extensively in support of the charge that there is serious upward bias in our price indexes because of failure to make sufficient allowance for quality improvement. The present paper is devoted to further consideration of the problem. For the 1960-65 period, it is found that the Hedonic measures employed by Griliches indicate negligible quality improvement in automobiles and provide no substantiation for the belief in an upward quality bias in the CPI. However, certain biases in the Hedonic indexes themselves limit their validity as measures of quality change.