This paper explores the extent to which goods follow systematic pricing patterns over their life cycle. The theoretical literature, and anecdotal evidence, suggests that new products are often introduced at high prices which decline as the good ages while, older goods exit the market at a discount. We outline and apply a smoothing-spline approach to the estimation of life cycle pricing effects using data on two different types of goods; supermarket products (beer, canned soup and cereals) and high-tech goods (desktop and laptop computers, and personal digital assistants). We find evidence for the existence of large life cycle pricing effects though there is some heterogeneity across products. The existence of life cycle effects on prices has important implications for the estimation of inflation. If prices change due to life cycle factors then this needs to be accounted for in estimating an index. Using our pricing function, we show that significant bias can arise from the failure to accurately represent the age structure of sampled products.
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Source: Monash University