Measuring consumerwelfareinthe CPU market: anapplication of the pure-characteristics demand model


  • This article is a revision of the second chapter of my Ph.D. thesis. I especially thank Ariel Pakes, Gary Chamberlain and Dale Jorgenson for their valuable advice and support. I also thank John Asker, Steve Berry, Liran Einav, Gautam Gowrisankaran, Matthew Gentzkow, Hugo Hopenhayn, Jason Hwang, Markus Mobius, Julie Mortimer, Amil Petrin, the Editor, two anonymous referees and seminar participants at various institutions for their helpful comments. I am grateful to Steve Berry and Ariel Pakes for sharing their search algorithm used to estimate the pure characteristics demand model with multiple coefficients. All errors are mine.


In this article, I estimate demand for the personal computer central processing unit and measure consumer welfare using the pure characteristics demand model. The model is based on a quasilinear utility function with multiplicative random variables and does not have the idiosyncratic logit error term, so that consumer welfare directly reflects consumers' valuation of product characteristics. Welfare calculations show that consumer surplus comprises approximately 90% of total social surplus and that large welfare gains have resulted from the introduction of new products.