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- Title
PRICE DISPERSION AND FUNCTIONAL PRICE INDICES.
- Authors
Baye, Michael R.
- Abstract
The paper examines the ramifications of price dispersion on the construction and interpretation of price or cost of living indices. The effects of price dispersion have been analyzed in many economic contexts. In the process of constructing a price index, the typical observation is that prices paid for commodities are dispersed across consumers, and hence, true cost of living indices differ across consumers even when preferences are identical. A few caveats and suggestions for constructing functional price indices in the presence of price dispersion are provided. The paper demonstrates that the practice of using the mean prices of commodities as representative leads to a spatial bias.
- Subjects
COST of living; PRICE indexes; ECONOMIC indicators; PRICES; CONSUMER price indexes; CONSUMER behavior; CONSUMER preferences; CONSUMER attitudes; CHOICE (Psychology); INDUSTRIAL statistics
- Publication
Econometrica, 1985, Vol 53, Issue 1, p217
- ISSN
0012-9682
- Publication type
Article
- DOI
10.2307/1911735