American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Quality Adjustment at Scale: Hedonic versus Exact Demand-Based Price Indices
American Economic Review
(pp. 1955–95)
Abstract
Item-level transactions data yield cost-of-living indices that can account for quality change and consumer substitution. Transactions data require confronting the rapid turnover of items because prices of new and existing products are interrelated in equilibrium. This paper evaluates multiple approaches to measuring quality change at scale. It shows that a hedonic superlative approach—using econometrics or machine learning for hedonic estimation combined with index formulas that require simultaneous observation of item-level price and expenditure—yields improved measures of the cost of living. Accounting for ubiquitous quality change and for consumer substitution yields lower measures of inflation than traditional, official methods.Citation
Ehrlich, Gabriel, John Haltiwanger, Ron Jarmin, David Johnson, Ed Olivares, Luke Pardue, Matthew D. Shapiro, and Laura Yi Zhao. 2026. "Quality Adjustment at Scale: Hedonic versus Exact Demand-Based Price Indices." American Economic Review 116 (6): 1955–95. DOI: 10.1257/aer.20230766Additional Materials
JEL Classification
- C43 Index Numbers and Aggregation; leading indicators
- C45 Neural Networks and Related Topics
- E31 Price Level; Inflation; Deflation
- L15 Information and Product Quality; Standardization and Compatibility
- L81 Retail and Wholesale Trade; e-Commerce