Effects of Quality Changes on the Price Index: A Hedonic Approach to the Estimation of a Quality Adjusted Price Index for Personal Computers in Japan

This paper studies the effects of quality changes on Japan's CPI by estimating a quality adjusted price index (hedonic price index) for discounted personal computers during 1990-94. According to the result, quality adjusted prices for personal computers in Japan have declined at an annual rate of 20-25% since 1990, reducing consumer durable CPI by 0.2% points per annum and overall CPI by 0.01% points. As consumer durables are apt to be affected by constant quality improvements, this result suggests that the conventional price index for consumer durables is likely to have substantially underestimated real declines in prices.