Seasonality and Prepackaged Software Price Indexes

In this paper, we construct a seasonally-adjusted price index for prepackaged software using detailed and comprehensive scanner data from the NPD Group. We document a large sales surge over the winter-holiday and claim that this seasonality is being driven by consumer heterogeneity. We introduce a novel approach for constructing the software component of the cost-of-living price index which explicitly accounts for this type of consumer heterogeneity. Using this index and the detailed product-level data, we find from 1997 to 2003 constant-quality software prices declined at an average 16.8 percent at an annual rate. To demonstrate the importance of properly accounting for heterogeneity, we compare a Mudgett-Stone price index, a representative-consumer approach to accounting for seasonality, to our index, and find substantial differences in the estimates of constant-quality annual price declines. ∗We would like to thank Ana Aizcorbe for many insightful discussions. In addition, comments by Dennis Fixler, Marshall Reinsdorf and other colleagues at the Bureau of Economic Analysis were quite helpful. Finally I would like to thank Andrew Miller for substantive help as a research assistant. The views expressed herein are our own and not necessarily those of the Bureau of Economic Analysis or the US Department of Commerce. †U.S. Department of Commerce, Bureau of Economic Analysis, Office of the Chief Statistician BE40, Washington, DC 20230; phone: (202) 606-9948; e-mail: [email protected]; webpage: http://www.copeland.marginalq.com