Changing product quality, rapid technological progress, and short product life cycles make it difficult to compute indices that correctly reflect the true price movements of IT products. This paper assesses the differences between traditional and quality adjusted indices by providing results for PC hardware. Transaction price data for the period from 1985 to 1994 are used to construct price indices for personal computers in Germany. The use of hedonic methods allows to correct for quality changes. Quality-adjusted hardware prices decline by 34 percent on average per year according to our hedonic index. The estimation confirms the importance of quality adjustment since the decline of average prices at 7 percent p.a. is substantially lower, thus overestimating computer prices and inflation. When the hedonic index for German computer prices is compared to various indices calculated for the US market it seems that the decline of quality adjusted prices in Germany has been significantly higher than in the US. However if prices are converted to US$ the average decline is about 30 percent which is consistent with results for the US.
Moch, Dietmar (2001), Price Indices for Information and Communication Technology Industries - An Application to the German PC Market, ZEW Discussion Paper No. 01-20, Mannheim. Download