This paper shows how to construct quality adjusted price indices without direct observation of product-level data (prices, quantities and characteristics). The technique used here allows for a welfare based measurement of price change using commonly available (at least for the manufacturing sector) plant-level data on revenue and cost. However, one has to be explicit about the evolution of the outside good quality and the structure of demand and supply. Using data on the Colombian beer industry and combining the methodologies originally proposed by Katayama, Lu and Tybout (2003), DeSouza (2006a) and Trajtenberg (1990) I am able to uncover the demand parameters and build welfare-based price indices for the 1977-1990 period.
price index; innovation; discrete-choice demand models
