Quality Change and Pricing Behaviour in the United Kingdom Car Industry 1956-1968

In the past, empirical analysis of pricing behaviour has been mainly concerned with list prices or actual transactions prices. Quality has been considered either as a separate issue like advertising or for some other reason to be exogenous. It is obvious however that optimal quality and optimal prices are far more interdependent than, for example, price and advertising expenditures for many if not most goods. This paper looks at some of the aspects of pricing behaviour in the United Kingdom private motor car assembly industry 1956-1968 where quality and quality change is thought to be particularly important. The first section describes the derivation of quality-adjusted prices for all cars in the sample for each year. This involves some changes on previously employed methods (Griliches, 1961; Cowling and Cubbin, 1972). These modifications allow a more sophisticated functional form to be used and also allow direct comparisons of quality adjusted prices in different years to be made. In Section II we report the estimation of a profits with the aid of a quality index for cars. This function is then employed to derive a price-marginal cost margin (and hence the Lerner index of effective monopoly power) for each year. This shows a remarkable fall after 1960.