Nonparametric estimation of a hedonic price index for ADSL connections in the European market using the Akaike Information Criterion

Abstract

It is evidence that the demand for Asymmetric Digital Subscriber Line (ADSL) connections increases day by day in all European countries as much as worldwide and it is well known that Internet's penetration is considerably amazing. At the same time, due to the fierce competition among ADSL connections providers, several packages are offered in attractive tariffs. As a product consists of various characteristics that consumers value, the question that arise could be summarized to the following: How should consumers' choices and preferences for ADSL connections affect tariffs and what are the more significant and powerful characteristics that shape tariffs of ADSL connections? This paper provides a hedonic price analysis of ADSL connections for the European market. A problem which is posed is the selection of the best model. So, in order to estimate prices a sliced inverse regression (SIR) is performed, without knowing the shape of the function. Then by applying Local Polynomial Regression (LPR) a possible shape of the hedonic function is given. Among several candidate hedonic models and by applying Akaike Information Criterion (AIC), the best one is derived. In order to evaluate the proposed methodology, tariffs' data have been collected from 15 European countries over the period from 2003 to 2005. Apart from tariffs, information on characteristics such as supported data rate (DR), maximum consumed data volume (V) and maximum allowed minutes on line (T) have been collected and analyzed.