A Hedonic Model of Computer Prices

I wrote this report as part of my final project for an enconometrics class. As it is a lengthy document with mathematical formatting that even modern browsers cannot handle, I’ve reproduced only the introduction below. I hope you’ll download the full paper (PDF).

A Hedonic Model of Computer Prices


Computers have become a virtual commodity. Most Windows-based personal
computer (PC) manufacturers produce nearly homogeneous products, sometimes even
in the same factories. It is impossible to ignore the rapid advances in technology over
the past thirty years that have brought personal computers with exponentially more
power than the mainframes of yore into the hands of typical consumers. Despite these
advances in technology, the inflation-adjusted price of a new PC has fallen only slightly
over the past twenty years. For example, a high-end 16-megahertz (MHz) 80386
computer with a small monochrome monitor and an 80-megabyte hard drive cost
$3792 (1996 dollars) in January 1988. Today, a high-end 3,060 MHz Pentium IV with a
19″ color display and 200-gigabyte hard drive costs $2695 (1996 dollars), a reduction in
price of only 29%.

However, this price index (in the loosest sense of the term) does not consider
the quality of the computer; if we were to divide the price of the computers by any
significant metric (such as CPU speed, hard drive capacity, or RAM quantity), one would
see that there has been a drastic reduction in the price of computers. Suppose one
were to divide the real price of the computer by its total MHz. The computer from
1988 was $237 per MHz compared to the current $0.88 per MHz. Using such a metric,
computer prices have fallen by 99.63%–quite a remarkable change, and quite different
from the 29% figure. What could be discovered, then, if one were to calculate the
change in price for a number of relevant factors?

My model attempts to quantify the value of a computer based on some metric of
its quality and can be used to analyze the prices of computers nearly twenty-five years
old. It is an important component of an overall quality-adjusted computer price model
(which is well beyond the scope of this assignment). However, it is not the intention of
this model to be a canonical metric of the value of PCs for any length of time. Instead,
the reader should consider this model as a snapshot of time, a model whose value is
greatest when compared to other similar models. Indeed, it is not the current price of
computers that is so interesting, but rather the trend. A hedonic model of computer
prices is useless: unlike a house, it is trivial to purchase every single different component
of a computer separately. We can easily determine the expected value of a computer by
summing the value of its components (whose true fl is trivial to discover independently),
adding a premium for assembled systems, and discounting somewhat based on age if

The drastic reduction of computer prices over the past twenty-five years has
created an entirely new culture in America; who could imagine bringing much of the
computing power of a $10,000 mainframe to the pocket of a elementary school child in
the form of a mere $60 gaming system? Who could envision a new globalization of
knowledge services, largely catalyzed by the rapid decreases in computer prices?

Read the rest. Download the Full Paper (PDF).