Hedonic prices for cars: an application to the Spanish car market, 1980-2005.

It has been largely argued that the increase in car ownership and use hascaused one of the main problems that transport policy has to face in terms of congestion and environmental costs. Among the determinants of car ownership car price holds an outstanding position. The question we address inthis paper is which price is the relevant one to be included in the demand equation. In our opinion, car prices should refer to the hedonic price index. As it is well known, the hedonic methodology assumes that heterogeneous goods can be viewed as consisting of a combination of characteristics.This assumption makes it possible to relate the price of the bundle to the level of the various characteristics. The estimation of an hedonic priceequation permits to account for quality changes and to construct a quality-adjusted price index. In order to carry out this work, a dataset has been constructed that contains information on the different car models sold in Spain during the period 1980-2005. Information is gathered on car price,technical and quality characteristics. The explanatory variables includedin the equation relate to the power of the car (e.g., horsepower/weight, gears), size, safety characteristics (e.g. brake system, airbag); comfort (air conditioning, doors) and fuel efficiency (fuel cost per km) and the brand of the car. The contributions of this paper are twofold. First we provide a methodological discussion about some of the unresolved issues related to the hedonic approach. In particular, we offer a possible solution for one of the most important issues, the change of the estimated coefficients -the implicit prices for the characteristics- over time. Additionally, we present different functional forms and discuss the use of weights in the hedonic regression. Second, we present the empirical results from the specification finally selected. Among other the following results can be pointed out: the increase in the car price index once quality is accounted for is well below the increase in the observed price, and it is negative in real terms; the measurement of quality change shows a continuous increase over time. Such measurement is obtained for all the characteristics that contribute to the quality index: car power, safety, fuel efficiency and comfort. For the covering abstract see ITRD E135582.