Adjacent Period Dummy Variable Hedonic Regressions and Bilateral Index Number Theory

The paper addresses whether hedonic regressions should be weighted (by either quantities sold or expenditures on the model) or not. To make some progress on the issue of what weights to choose, the paper uses the time dummy variable hedonic regression model applied to only two periods. In this framework, the time dummy becomes a measure of price change between the two periods and a transformation of the estimated dummy variable can be regarded as a generalized bilateral index number formula. The axiomatic properties of this measure of price change are examined for various alternative weighted schemes. If the models in the two periods are exactly the same, the hedonic regression measure of price change reduces to a bilateral index number formula.