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Pricing Patterns over Product Life-Cycle and Quality Growth at Product Turnover

: Empirical Evidence from Japan

June 14, 2016
Nobuhiro Abe*1
Yojiro Ito*2
Ko Munakata*3
Shinsuke Ohyama*4
Kimiaki Shinozaki*5

Abstract

This paper examines pricing patterns over the product life-cycle and quality growth at the time of product turnover regarding a wide range of durable consumer goods sold in Japan. Applying hedonic regressions with time dummies to large granular data sets obtained from Kakaku.com, the most popular price comparison website in Japan, we find out that sellers tend to raise product prices more than those justified by quality improvements to ensure the profitability at product turnover. A glance at the pricing patterns reveals that the prices of new products decrease gradually with the elapse of time, however, the pace of falling in prices varies considerably among commodities. The quality improvement ratio, which measures the contribution of quality growth to the price difference between matched pair of a new product and an old one by commodities, exhibits a unimodal distribution slightly fat-tailed to the right. The mode value of the distribution is about 0.5-0.6 for home electrical appliances and about 0.6-0.7 for digital consumer electronics. Those results provide an empirical support to the existing quality adjustment method in the field of the price index, so-called 50% rule, which has been implemented by some statistical agencies. Our findings bring significant implications for improving quality adjustment methods under uncertainty of quality evaluation and lead to the better understanding of the firms' price setting behavior.

JEL Classification
C43, D22, L15

Keywords
price index, quality adjustment, price setting, hedonic approach

This paper was presented at the Meeting of the Group of Experts on Consumer Price Indices held in Geneva on May 2016. The authors would like to thank Paul Armknecht, Alain Gallais, Paul Schreyer, seminar participants at Hitotsubashi University, Senshu University, NOWCAST, Inc., and staff members of the Bank of Japan for their useful comments. The opinions expressed here, as well as any remaining errors, are those of the authors and should not be ascribed to the Bank.

  1. *1Research and Statistics Department, Bank of Japan
    E-mail : nobuhiro.abe@boj.or.jp
  2. *2Research and Statistics Department (currently Kobe Branch), Bank of Japan
    E-mail : youjirou.itou@boj.or.jp
  3. *3Research and Statistics Department, Bank of Japan
    E-mail : kou.munakata@boj.or.jp
  4. *4Research and Statistics Department (currently International Department), Bank of Japan
    E-mail : shinsuke.ooyama@boj.or.jp
  5. *5Research and Statistics Department, Bank of Japan
    E-mail : kimiaki.shinozaki@boj.or.jp

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