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.