Economics of Innovation and New Technology Vol. 20, No. 2, March 2011, 183–204
Estimating computer depreciation using online auction data Christos Antonopoulosa * and Plutarchos Sakellarisb,c a Council of Economic Advisers, Ministry of Economy and Finance, 5-7, Nikis Street, Syntagma Square, GR10180, Athens, Greece; b European Investment Bank (EIB), 100 Blvd Konrad Adenauer, L-2950, Luxembourg; c Department of Economics, Athens University of Economics and Business and IMOP, 76, Patission Street, GR10434, Athens, Greece
(Received 30 January 2009; final version received 2 October 2009 ) Personal computer prices decline rapidly with age. The price of a four-year-old used computer is almost one tenth of the price of a new one. This paper provides new evidence on why prices of personal computers decline so rapidly as they age, using online auction data from eBay. An innovative feature of the dataset is that it contains actual transaction prices for both desktops and notebooks, as well as exact age in days. By using a sample of used Dell computers, we examine the causes of this rapid decline. We find that age is not important due to minimal physical deterioration. Prices decline because used computers have inferior technical characteristics compared to new ones. In addition, a computer loses about 20–25 percentage points of its value the instant that it is sold. Finally, some auction characteristics are significant. Keywords: personal computer; hedonic function; physical deterioration; technical characteristics; auction characteristics JEL Classification: O30; O4
1.
Introduction
The most remarkable economic event of the late 1990s was the significant increase in labor productivity. The main reason for this increase was mainly technological progress, much of it related to the production and use of personal computers. Whelan (2002), Oliner and Sichel (2000), and Jorgenson and Stiroh (2000) found a significant boost of growth in labor productivity between the first and the second half of the 1990s. Personal computers present the following puzzles: first, their physical deterioration (wear and tear) is minimal, even though their economic depreciation is huge. A used computer can do exactly the same computations as a new one, without any loss of efficiency. Second, new models, even though they are more powerful than the preceding ones, are sold at lower prices. Thus, prices of used computers fall dramatically in order to equalize the ratio of their computing power to price with the ratio of new ones. *Corresponding author. Email:
[email protected] ISSN 1043-8599 print/ISSN 1476-8364 online © 2011 Taylor & Francis DOI: 10.1080/10438590903385095 http://www.informaworld.com
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The correct measurement of capital depreciation is crucial for estimating the user cost. The overestimation of the user cost leads to an underestimation of the contribution of PC capital services to productivity studies and overstates the contribution of total factor productivity, providing a misleading picture of the determinants of growth, a point first mentioned by Jorgenson and Griliches (1967). Unfortunately, personal computers exhibit a complex pattern of depreciation and the usual depreciation methods are not always correct. Griliches (1961) was the first researcher who estimated depreciation rates for automobiles, using price hedonics. Hulten and Wykoff (1981a, 1981b) estimated economic depreciation rates for assets and for industries in the USA, based on studies of used asset prices for individual asset classes. Oliner (1993) estimated economic depreciation rates and the rate of constant-quality price change for IBM mainframes. Oliner (1992) and Jorgenson and Stiroh (1994) measured the depreciation of computer peripheral equipment and computers, respectively. The Bureau of Economic Analysis adopted the main results of the previous studies for use in the National Income and Product Accounts (Fraumeni 1997; Bureau of Economic Analysis 2003). More recent studies, such as Geske, Ramey, and Shapiro (2004), Wykoff (2003), and Doms et al. (2004) estimated depreciation and revaluation rates for personal computers. As an asset becomes older, its value declines. This is due to two effects: economic depreciation, which is the decline in price with age given time, and revaluation, which is the change in price with the passage of time given age. Economists divide economic depreciation into two effects: the first effect is obsolescence,1 which is caused by the introduction of a new vintage of the asset that embodies superior technology. The residual effect, which is caused by aging, is defined as age-related deterioration. Both effects together explain the rapid decrease of the prices of used PCs. The main aim of this paper is to provide evidence in decomposing the enormous price differences between new and used computers. Due to the unavailability of the prices of used computers when they were new, we cannot estimate their economic depreciation. Nevertheless, we can estimate the effect of age and technical characteristics by using a hedonic function. In addition, we compare the prices of used computers to prices of new ones by adjusting quality. We follow the approach in Oliner (1993, 1996). We use a hedonic function that regresses prices of used computers on computer specifications, characteristics of auction and age. We divide our sample into two groups, desktops and notebooks, and we examine specific characteristics for each group. The main contribution of this paper is the use of actual prices from completed transactions, instead of list prices from various bluebooks that the previous literature used. Second, we use the exact age of every PC with the precision of a day; the previous literature used approximate ranges or the introduction date of the model and not the actual manufacture date. The difference between these two dates might be many months and so the age-related results would probably be biased. Third, we study more characteristics than the other studies, such as existence of optical drives, modem, network adapter, warranty, weight, operating system and commercial software. Fourth, we examine in more depth the common characteristics, such as the central processing unit (CPU), by studying not only the speed, but also the type. Finally, we add specific auction characteristics that affect prices. Our main result is that age is an insignificant factor in price differentials between new and used computers, because physical deterioration is almost negligible. Used computers are cheaper because they incorporate inferior technology, compared with new ones, and because the value of a new computer declines by 20–25% when it is sold. CPU speed, amount of RAM and hard disk capacity are the most important technical characteristics. Finally, some auction characteristics are significant.
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The paper is organized as follows. Section 2 describes our data. Section 3 discusses the theoretical model. Section 4 provides estimates of price declines. Sections 5 and 6 present the hedonic function for desktops and notebooks respectively. Section 7 summarizes the decomposition of price declines into age effects, technical characteristics, and auction characteristics. Finally, in Section 8, we present our conclusions. 2. Data Our data are based on transactions that took place on eBay, the world’s biggest online marketplace for the sale of goods and services by a diverse community of individuals and firms. On an average day, there are millions of items listed on eBay. Due to the large number of sellers and buyers, eBay is the biggest and most competitive marketplace of used computers in the United States. We focus only on Dell computers, because each Dell computer has a unique serial number, which is called ‘Service Tag’. By using this serial number in the Dell website, anyone can learn the shipment date, the original configuration and the remaining warranty. We divide our sample into desktops and notebooks, because there are many differences between them. It is easier to upgrade a component of a desktop compared with a notebook, in which most of the components are integrated into the motherboard. Notebooks also have some special characteristics, such as weight or the size of the monitor; these characteristics are not so important for desktops. Finally, notebooks are ceteris paribus, more expensive than desktops. We especially focus on Dimension and Optiplex desktops and on Inspiron and Latitude notebooks, which target on home users and small businesses, respectively. We also focus exclusively on auction transactions. We examined all the offers for desktops and notebooks that took place on eBay between 11 November 2003 and 31 December 2003. After the end of the period, we kept the finished transactions, and we gathered data about the characteristics of the computer, such as the speed and type of CPU, the size of the RAM and hard disk, the model of the computer, the remaining warranty, the existence of a monitor, CD-ROM, DVD-ROM, CD-Recordable, DVD-Recordable, modem, network adapter, zip drive and if it was refurbished. We also gathered data about the auction characteristics, such as the starting price, the days of offer, the number of bids and the seller’s rating as it was reported by eBay. We excluded the computers that were inoperable and were sold for parts, as well as those that had missing data. At the end of this selection, we were left with 1695 observations for desktops, but in only 706 of them the ‘Service Tag’ was reported. Then we used the ‘Service Tag’ in the Dell website to collect data for the shipment date and the warranty, and to check if the characteristics of each computer were correct. The newest computer was first shipped on 10 September 2003 and the oldest one on 11 March 1997. The transaction prices range from a minimum of $9.99 to a maximum of $510 and the average price is $186.85. The CPU speed varies from 233 to 1800 MHz with a mean of 840.56 MHz. The amount of RAM ranges from a minimum of 32 MB to a maximum of 512 MB with a mean of 248.76 MB. The hard disk size varies from 3 to 60 GB with a mean of 17.17 Gb. There are 596 desktops that belong to the Optiplex family and 110 ones that belong to the Dimension family. There is also a wide variety in CPU types: 68 Celeron, 61 Pentium 2, 552 Pentium 3 and 24 Pentium 4. Some computers were sold with an operating system installed; in particular, 72 computers were sold with an operating system, mainly with Windows 2000 Professional. Most of the computers were sold with an optical device; 98.87% were sold with a CD-ROM, 19.83% were sold with a DVD-ROM, 5.38% were sold with a CD-Recordable, 4.39% were sold
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Table 1.
Attributes of used desktops in the sample grouped by age.
Observations
Final price
Days of offer
Production date
Number of bids
Initial offer
Seller’s rating
CPU speed (in MHz)
RAM memory (in MB)
Hard disk drive (in GB)
1.5–2 2–2.5 2.5–3 3–3.5 3.5–4 4–4.5 4.5–5 5–5.5 5.5–6 6–6.5
70 182 212 95 51 33 30 14 16 3
$218.77 $251.65 $202.39 $153.74 $139.16 $97.07 $60.93 $35.52 $37.44 $31.33
3.91 3.25 3.43 4.38 4.77 4.91 4.73 5.71 4.00 1.67
26 January 2002 13 August 2001 22 February 2001 12 August 2000 13 March 2000 4 September 1999 11 March 1999 26 August 1998 23 February 1998 19 November 1997
14.99 16.32 16.55 14.32 17.17 13.73 9.90 6.43 5.13 4.67
$7.16 $5.19 $13.65 $26.56 $8.70 $11.79 $19.36 $12.57 $16.55 $24.99
10,632.53 10,307.35 10,644.10 9838.22 8392.66 7921.18 8483.10 5049.29 10,730.56 12,127.00
1,092.86 1,014.01 887.95 748.09 650.58 499.48 426.10 355.64 315.38 266.00
261.49 293.63 242.43 234.72 278.34 206.55 173.87 105.14 122.00 128.00
19.72 22.75 17.74 16.13 19.07 12.38 8.65 6.19 7.46 8.43
Age
CD
DVD
CD-RW
Modem
Network adaptor
Zip drive
Refurbished
Warranty
Transportation cost
Age average
1.5–2 2–2.5 2.5–3 3–3.5 3.5–4 4–4.5 4.5–5 5–5.5 5.5–6 6–6.5
0.99 1.00 0.98 0.98 1.00 1.00 0.97 1.00 1.00 1.00
0.01 0.26 0.34 0.06 0.21 0.09 0.00 0.00 0.00 0.00
0.04 0.09 0.04 0.05 0.02 0.03 0.07 0.07 0.00 0.00
0.04 0.05 0.04 0.05 0.02 0.03 0.07 0.00 0.06 0.00
0.34 0.36 0.89 0.97 0.92 0.94 0.97 0.79 0.94 1.00
0.00 0.05 0.02 0.12 0.04 0.21 0.00 0.00 0.00 0.00
0.66 0.92 0.81 0.18 0.02 0.00 0.00 0.00 0.00 0.00
434.14 243.88 87.72 18.86 30.32 30.58 22.33 15.36 26.88 30.00
$29.51 $23.14 $26.04 $40.46 $44.78 $44.19 $42.44 $40.50 $47.46 $49.95
677.44 840.74 1012.52 1200.18 1350.75 1542.52 1719.13 1914.57 2116.13 2209.33
Notes: Age is measured in years in the first column whereas in the final column average age is in days. Final price = transaction price of used computer, dollars (mean); days of offer = period that the computer was listed in eBay, days (mean); production date = the date that the computer was shipped by Dell (mean); number of bids = number of bids in the eBay auction (mean); initial offer = the price that the seller assigned as a start price, dollars (mean); seller’s rating = the feedback score that the seller had in eBay (mean); CPU speed = clock speed of CPU, megahertz (mean); RAM = random access memory, megabytes (mean); hard disk drive = size of hard disk, gigabytes (mean); monitor size = size of monitor, inches (mean); video memory = display adaptor installed memory, megabytes (mean); has CD = 1 if it has a CD drive (mean); DVD = 1 if it has a DVD drive (mean); CD-RW = 1 if has a CD recordable drive (mean); modem = 1 if it has a modem (mean); network adapter = 1 if it has a network adapter (mean); zip drive = 1 if it has a zip drive (mean); refurbished = 1 if it was refurbished by Dell (mean); weight = minimum weight, grams (mean); warranty = the remaining period of warranty in days (mean); transportation cost = the transportation and insurance cost that it is paid by the buyer, in dollars (mean); age = age of the computer when sold, in days (mean).
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Age
Table 2. Age
Attributes of used notebooks in the sample grouped by age.
Observations Final price
Production date
Number of bids
Initial offer
Seller’s rating
2.33 3.00 3.79 4.67 3.03 3.06 3.13 3.78 5.80 7.00 n/a 3.00
22 August 2003 28 March 2003 27 August 2002 1 February 2002 13 July 2001 4 April 2001 16 August 2000 21 March 2000 19 August 1999 5 April 1999 n/a 14 May 1998
19.00 20.00 23.36 14.00 20.78 20.51 20.70 18.11 27.80 13.00 n/a 22.00
$304.66 $5.00 $96.91 $328.78 $3.41 $8.35 $5.23 $19.00 $8.00 $99.00 n/a $25.50
1258.67 1020.00 6520.86 4935.00 10,184.65 10,277.27 10,233.59 7595.78 1130.00 53.00 n/a 265.00
CPU speed RAM memory Hard disk drive Monitor (in MHz) (in MB) (in GB) size
0–0.5 0.5–1 1–1.5 1.5–2 2–2.5 2.5–3 3–3.5 3.5–4 4–4.5 4.5–5 5–5.5 5.5–6
3 1 14 9 300 185 61 18 5 1 0 2
1500.00 2000.00 1139.29 1233.33 760.49 740.27 588.52 492.44 390.00 300.00 n/a 249.50
341.33 256.00 288.00 597.33 246.56 250.81 206.69 206.22 128.00 128.00 n/a 64.00
23.33 20.00 24.29 25.56 19.36 18.73 11.29 11.16 7.12 4.30 n/a 7.91
13.87 14.10 14.16 14.28 14.05 14.11 14.06 14.07 13.64 13.30 n/a 12.10
Age
Video memory
CD
DVD
CD-RW
Modem
Network adaptor
Weight
Refurbished
Warranty
Transportation cost
Age (average)
0–0.5 0.5–1 1–1.5 1.5–2 2–2.5 2.5–3 3–3.5 3.5–4 4–4.5 4.5–5 5–5.5 5.5–6
32.00 32.00 20.00 30.22 8.05 8.27 7.74 7.17 3.60 2.50 n/a 2.50
1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.94 1.00 1.00 n/a 0.50
0.33 1.00 0.14 0.44 0.01 0.01 0.00 0.06 0.00 0.00 n/a 0.00
0.33 1.00 0.14 0.33 0.00 0.01 0.02 0.06 0.00 0.00 n/a 0.00
0.67 1.00 0.79 1.00 0.98 0.80 0.28 0.33 0.60 1.00 n/a 0.50
1.00 1.00 0.93 1.00 0.10 0.05 0.03 0.33 0.60 1.00 n/a 0.50
2763.33 3300.00 2649.29 2868.89 2497.20 2641.97 3022.95 3066.11 2924.00 2630.00 n/a 2630.00
0.00 0.00 0.50 0.44 0.91 0.95 0.95 0.61 0.00 0.00 n/a 0.00
704.00 30.00 597.79 279.78 74.37 42.38 0.00 4.00 8.40 0.00 n/a 0.00
$33.33 $35.00 $23.32 $23.10 $18.82 $18.49 $18.55 $22.38 $29.00 $26.75 n/a $10.00
88.67 241.00 450.57 657.89 862.85 964.26 1191.03 1337.94 1549.80 1689.00 n/a 2014.00
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$830.00 $710.00 $758.67 $772.00 $447.80 $437.02 $377.29 $346.84 $291.95 $212.50 n/a $183.50
Days of offer
Note: Same as in Table 1.
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Desktops 250 Total Refurbished New
200
150
100
50
0 New
Notebooks 350 Total Refurbished New
300 250 200 150 100 50 0 New Figure 1. Histogram of age distribution. Note: Age is measured in years.
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with a modem, 71.67% were sold with a network adapter, 4.96% were sold with a zip drive and 0.99% were sold with a monitor. All the main characteristics are summarized in Table 1. For our analysis, it is useful to have transaction prices also for brand new computers which were sold by Dell to end-users through the Internet. We obtained pricelists for new computers that were sold directly by Dell during the same period. We calculated the price for different model configurations varying CPU frequencies, RAM amounts, hard disk capacities and optical devices. This method generated prices for 170 different configurations, 128 of them were Optiplex and the rest were Dimension. We added these to our sample, setting the age equal to zero. Therefore, the final desktop sample contains 876 observations. We followed the same methodology for notebooks. We obtained data for 2430 notebooks, but only 599 had service tags. The newest computer was shipped on 31 October 2003 and the oldest on 14 May 1998. The computers’ prices range from a minimum of $42 to a maximum of $1425 and the average price is $446.17. The CPU speed varies from 233
Desktops 1600
Price
1200
800
400 0 0
1
2
3 4 Age
5
6
7
Notebooks 2800 2400
Price
2000 1600 1200 800 400 0 0 Figure 2. Age and price scatter plot. Note: Age is measured in years.
1
2
3 Age
4
5
6
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to 2000 MHz with a mean of 744.84 MHz. The amount of RAM ranges from a minimum of 48 MB to a maximum of 1024 MB with a mean of 247.53 MB. The hard disk capacity varies from 810 Mb to 60 GB with a mean of 18.16 GB. The display size varies from 12 to 15.4 in with a mean of 14.06 in. There exist 575 notebooks that belong to the Latitude family and 24 ones that belong to the Inspiron family. There are five different CPU types: 23 Celeron, 9 Pentium 2, 562 Pentium 3, 4 Pentium 4 and 1 Pentium M (Centrino). Ninetyeight computers were sold with an operating system installed, mainly with Windows 2000 Professional and four of them have installed Microsoft Office. Most of the notebooks were sold with an optical device; 99.67% were sold with a CD-ROM, 2.34% were sold with a DVD-ROM, 1.84% were sold with a CD-Recordable, 82.30% were sold with a modem and 13.02% were sold with a network adapter. These characteristics are summarized in Table 2. We also obtained prices for new notebooks by Dell. We constructed 162 different configurations and added them to the sample as age-zero observations. Thus, the final notebook sample had 761 observations. The histograms of age distribution are shown in Figure 1. The age and price scatter plot is shown in Figure 2.
3. The model By using the ‘Service Tag’, we can find the shipping date of the computer. Taking into consideration that Dell has low stock and that the period between the assembly and the shipping is very small, someone can calculate precisely the age of the particular computer to a day. It is common sense that new computers are more expensive than used ones. New computers embody advanced technology and therefore, they have more advanced characteristics due to technological progress; the CPU speed is higher and the amount of RAM and the capacity of hard disks are larger. Secondly, old computers have been used for a certain period and therefore, they exhibit physical deterioration (wear and tear). Their service lives are expected to be shorter and their performance may be lower. Thirdly, when a new asset is sold, its value declines immediately. Geske, Ramey, and Shapiro (2004) called this effect ‘age-zero depreciation’. Finally, retail characteristics may influence prices. In our sample, new computers are sold directly by Dell, while used computers are sold by individuals at eBay. In the rest of the paper, we will examine the price differences between new and used computers, and decompose these differences into the previous four effects. We assume that t is the age in days of a computer and is calculated as follows: t = date of last offer of computer in the eBay − shipping date of computer from Dell. We make the reasonable assumption that the shipping date coincides with the production date. We define a vector X with the specifications of the computer. These specifications are the type and the speed of CPU, the amount of RAM, the hard disk capacity, the existence of an optical drive, modem, network adapter, zip drive, monitor, the remaining warranty, and some other characteristics. In addition, we define a vector Y with the qualitative characteristics of the auction, such as the starting price of the auction, the seller’s rating from eBay, the days of duration of auction and the number of bids. We can suppose that price P is a function of those three parameters and can be written as: P(ti , Xi , Yi ). According to Triplett (1989), most researchers in the hedonic literature on computers prices, including Berndt, Griliches, and Rappaport (1995), use the double-log form. Triplett (2004) performed a Box–Cox test to choose the best functional form and even though all
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tests were rejected statistically, the linear form was slightly better than the others. We also use the linear form since most of the characteristics are dummy variables to simplify calculations. The adjusted R¯ 2 of both the linear and the double log forms are almost equal. The econometric equation has the following form: Pi = a + bj Xji + ck Yki + f (ti ) + εi , (1) j
k
where f (ti ) is a function of age. 3.1. Age effects We use two alternative specifications to capture the impact of age. In the first form, we follow Oliner (1993) and use a third-order polynomial, in order to describe the age effect. Thus, Equation (1) becomes: Pi = a +
bj Xji +
j
ck Yki +
3
dm tim + εi .
(2)
m=1
k
We also use a simpler version of Equation (2) where the relation between age and the logarithm of price is linear and the polynomial becomes first-order. Pi = a + bj Xji + ck Yki + dti + εi . (3) j
k
Many researchers use dummies to capture age effects. Since our data on age is very detailed, the use of age dummies would lead to loss of information. Nevertheless, the main results do not change dramatically if we use age dummies. 3.2. Computer characteristics For almost 40 years, the famous Moore’s law has been driving the computer industry. Moore (1965) predicted that the capacity of semiconductors would double every 18 months. Even though such technological progress is good for consumers who buy faster and cheaper PCs, economists encounter some serious problems in measuring price and quality changes due to selection bias and other methodological problems. In addition, the introduction of new, advanced computers makes old computers obsolete. Obsolescence refers to the inability of a computer to be compatible with modern equipment, hardware, and software. The overall speed and the capabilities of a used computer do not change over time, if every subsystem is working properly. The problem is that it is not always compatible with modern hardware and software. For example, a used computer, dated 1996, can run Windows 95 with the same speed as when it was new. Nevertheless, it cannot run Windows XP, which is the most widespread operating system available today. Similarly, it can run applications of its vintage perfectly well, but not recent ones, which potentially are the standard applications in their category. Moreover, because there is not always compatibility between different versions of the same program, obsolescent computers potentially cannot be used in a modern office environment. Similar problems also exist with hardware. The computer collaborates irreproachably with old hardware as when it was new. The problem is focused on the modern hardware.
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For example, a computer without a USB port cannot be connected with most modern printers that have only USB ports and not parallel. Perhaps the computer may have a USB port and it can be connected with the printer, but there is no driver for its operating system. Finally, it may not completely exploit modern capabilities (for example a modern hard disk can be operated in an old computer, but it will be much slower than if it was operated in a modern computer, because of the old hard disk controller). It is obvious that obsolescence is mainly due to the development of technology that introduces new products that are not compatible with old computers. Therefore, obsolescent computers, even though they are completely functional, cannot exploit modern capabilities, and become useless. The choice of characteristics that will be selected is a difficult question because it is based on the subjective judgment of the investigator. The characteristics that will be chosen should have two attributes. First, they must be important in the conscience of the consumers, and for this reason they would be willing to pay for them (Triplett 2004). Second, they must be reported by the sellers, so every buyer should know them. According to Triplett (1989), the most important characteristics that are used in all the literature is the CPU speed and the amount of RAM. A fact that facilitates the present research is that Dell uses only Intel processors in the computers of our sample, making the comparison easier. The CPU speed depends mainly on two factors: the CPU frequency and its type. For the first factor, we use the speed of operation and for the second factor, we use dummies for all types except for Pentium 3 CPUs, which is the most common processor in the sample. We use dummies for whether it is Pentium 2, Pentium 4, Celeron or Pentium M (Centrino). Celeron CPUs coexist with all the other processors of the Pentium family. Intel has presented Celeron as a low-cost processor with fewer capabilities than Pentium 2, 3, 4 processors at the same speed, and hence overall they are slower. We expect that the speed of operation has a positive relation with the price, the Celeron and Pentium 2 dummies’ coefficients have a negative sign, and the Pentium 4 and Centrino dummies’ coefficients have a positive significance. Differences, however, also exist among the same processor types. For example, there are two different models of Pentium 4 at the same speed: the first are those without Hyper-Threading and Front Side Bus at 533 MHz, and the second ones are those with Hyper-Threading and Front Side Bus at 800 MHz. Hyper-Threading is a feature that may considerably increase the performance of certain applications, and so even if they both belong to the same type and have the same speed, the two processors have different performances and prices. We can see similar variations in the remaining types of processors (Pentium 2 and Pentium 3). Unfortunately, most sellers report only the type and the speed of processors and not the additional characteristics. We must note that a very important factor for the speed of a computer is the motherboard. Two same processors in two different motherboards may have very different performances. Once again, the sellers do not announce the model or the motherboard characteristics and so we cannot use this important characteristic. The best way to solve the above problems would be the use of benchmarks in order to precisely compute the processor speed. Unfortunately, there is no common standard in benchmarks and no seller publicizes the particular information. Additional characteristics that affect prices are the amount of RAM, the hard disk capacity, the existence and the type of monitor, the existence and the speed of CDROM, CD-Recordable, DVD-ROM, DVD-recordable, the existence of zip drive, network adapter, modem, weight, the refurbishment, as well as the remaining warranty duration and transportation cost. We also examine if the existence of installed software is related to the price. We use a dummy with a value of one if a Microsoft operating system was installed and zero otherwise.
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None of the desktops had installed other commercial software (Microsoft Office, Photoshop, etc.), and so we did not study this parameter. 3.3. Auction characteristics The price is also affected by other parameters that do not have any relation to the product, but with the auction characteristics. There always exists the danger that a buyer gets a ‘lemon’. That is if buyers trust a seller, they will accept to pay a premium. We study the auction characteristics that are available, such as the starting price, the number of bids, the seller’s rating as it is announced by eBay, and the days of offer. These characteristics – even if they do not have any relation to the qualitative characteristics of the computer – may potentially influence the price. 4. Estimates of price declines Figure 3 shows the price declines for desktops and notebooks. Prices fall rapidly at the beginning, but then the decline is smoother. This is an indication that age-zero depreciation is present. Desktops’ prices decline more rapidly than notebooks. This is an indication that either technological process and therefore, obsolescence is more important in desktops or that age affects mostly desktops.
Desktops
4.5–5
5–5.5
6.5–6
6–6.5
4–4.5
4.5–5
5–5.5
5.5–6
4–4.5
3.5–4
3–3.5
2.5–3
2–2.5
1.5–2
1–1.5
0.5–1
New
0–0.5
$1000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0
Notebooks
Figure 3. Price averages using 6-month intervals. Note: Age is measured in years.
3.5–4
3–3.5
2.5–3
2–2.5
1.5–2
1–1.5
0.5–1
0–0.5
New
$1800 $1600 $1400 $1200 $1000 $800 $600 $400 $200 $0
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Unfortunately, there are no data for desktops with age less than a year and a half. The average desktop aged from 1.5 to 2 years is four times cheaper than a brand new computer. The next category (desktops aged from 2 to 2.5 years) is slightly more expensive because most of them are refurbished by Dell. Prices decline until the age of 5.5 years old; desktops aged from 5.5 to 6 years are more expensive than desktops aged from 5 to 5.5 years. This is consistent with Ramey and Shapiro (2001) and Geske, Ramey, and Shapiro (2004) who found that there was a premium for old assets that were no longer manufactured. Prices of desktops aged from 6 to 6.5 years are just 3.5% of the average price of a brand new one. The results for notebooks are slightly different. Notebooks aged from 0 to 2 years have almost constant prices, which are about half the price of an average brand new notebook. From that point, prices decline with age, and the price of a notebook aged from 5.5 to 6 years is almost one tenth of the average price of new ones. The price ratio of used to new computers is higher in notebooks than in desktops for every age category; notebooks have higher resale value than desktops. In this part, we compared prices by assuming that all computers are homogeneous, and only age differed. Obviously, this is not the case, since computers in our sample exhibit technological progress. Therefore, we should incorporate computer characteristics in our analysis. 5.
Desktops
5.1. Results of age effects In this section, we examine the relation of age and technical characteristics to price, using Equations (2) and (3), without taking into account the auction characteristics for the moment. Firstly, we use the whole sample, which includes both new and used desktops, and we regress prices on technical characteristics only to examine whether there are significant differences in each subsample. The Chow breakpoint test rejects the hypothesis of constant coefficients in both subsamples. If we estimate the above equation twice, one for new and one for used desktops, we find that the coefficients for CPU speed, amount of RAM and hard disk capacity are statistically higher for the sample of new computers than for the sample of used ones. This means that consumers appreciate these characteristics more on new desktops. The next step is to estimate Equations (2) and (3) (without auction characteristics) only for used computers. Columns 1 and 2 of Table 3 show the results with the statistically significant characteristics. Since all functions exhibit heteroscedasticity, all standard errors are White-adjusted. In both regressions, the age coefficients are not statistically different from zero; when we take into account technical characteristics, age is not significant. Consumers do not value age, since wear and tear effects are almost negligible. We examine whether there exists multicollinearity between age and the rest of the technical characteristics. Only CPU speed is highly correlated with age; the correlation coefficient is −0.86. The remaining characteristics, even though they are inversely correlated with age, have lower correlation coefficients. The previous analysis was based on the real age of computers. We extend our analysis by using the introduction age, i.e. the period between the date of last offer of the computer in the eBay and the date on which the model was launched. Table 4 summarizes the main findings. The results are almost the same: introduction age is not significant at any regression and all technical characteristics are statistically significant at the 5% level (with the exception of the ‘Pentium 2’ at regression 1).
Economics of Innovation and New Technology Table 3.
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Decomposing prices of used desktops into age effects, technical and auction characteristics. (1)
(2)
(3)
(4)
Age 0.017 (0.013) 0.309 (0.178) 0.033∗ (0.014) 0.265 (0.184) −0.000215 (0.000125) −0.000177 (0.000131) Age2 4.96E−08 (2.77E−08) 4.20E−08 (2.94E−08) Age3 0.207∗ (0.017) 0.209∗ (0.015) 0.210∗ (0.016) CPU speed 0.205∗ (0.015) 0.087∗ (0.014) 0.083∗ (0.015) 0.083∗ (0.015) RAM 0.088∗ (0.014) 1.261∗ (0.242) 1.146∗ (0.234) 1.128∗ (0.236) Hard disk 1.291∗ (0.238) −40.924∗ (5.833) −39.153∗ (5.361) −36.884∗ (5.770) Celeron −44.121∗ (5.388) −13.106∗ (6.378) −16.691∗ (5.712) −13.684∗ (6.296) Pentium 2 −18.005∗ (5.910) −15.302∗ (4.286) −8.266 (4.230) −9.253∗ (4.384) Optiplex −14.104∗ (4.066) ∗ ∗ 37.587 (16.436) 30.035 (15.589) 26.319 (15.270) Monitor 41.051 (16.959) 0.075∗ (0.021) 0.061∗ (0.015) 0.071∗ (0.021) Warranty 0.058∗ (0.015) ∗ ∗ ∗ 32.514 (4.329) 45.023 (5.168) 42.403∗ (5.689) Refurbished 35.378 (4.080) 18.150∗ (6.905) 14.907∗ (6.655) 14.930∗ (6.625) CD recordable 18.166∗ (6.965) 10.155∗ (3.912) 8.497∗ (3.884) 8.056∗ (3.978) Network adaptor 10.954∗ (3.777) 9.681∗ (4.338) 11.657∗ (4.500) 10.994∗ (4.402) Operation system 10.384∗ (4.345) Seller’s rating 0.000435 (0.000346) 0.000354 (0.000343) 1.164∗ (0.233) Number of bids 1.178∗ (0.230) 3.998∗ (0.980) Days of offer 3.975∗ (0.974) 0.130 (0.067) Starting price 0.138∗ (0.068) Constant −70.1401∗ (28.020) −194.411∗ (84.982) −136.157∗ (31.567) −229.373∗ (85.688) 0.826 0.826 0.836 0.836 R2 adjusted S.E. of regression 33.826 33.793 32.879 32.866 Log likelihood −3480.698 −3478.978 −3458.587 −3457.297 Notes: Dependent variables are prices of used desktops and notebooks. See notes for Tables 1 and 2 for rest of variables. Total number of observations is 706 and 599, respectively. ∗ Coefficient significant at the 5% level.
Table 4.
Decomposing prices of used desktops into age effects, technical and auction characteristics. (1)
(2)
(3)
(4)
Technological age −0.021 0.032 (0.218) −0.014 −0.011 −7.20E−05 (0.000135) −4.89E−05 (0.000144) Technological age2 2.30E−08 (2.71E−08) 2.03E−08 (2.90E−08) Technological age3 0.175∗ (0.014) 0.179∗ (0.014) 0.174∗ (0.014) CPU speed 0.178∗ (0.014) 0.093∗ (0.015) 0.082∗ (0.015) 0.087∗ (0.015) RAM 0.088∗ (0.014) 1.246∗ (0.241) 1.127∗ (0.235) 1.124∗ (0.236) Hard disk 1.255∗ (0.238) −46.290∗ (5.243) −43.786∗ (4.942) −42.873∗ (5.038) Celeron −46.992∗ (5.125) 0.603 (5.265) −14.515∗ (6.527) Pentium 2 −4.014 (5.362) −15.673∗ (6.469) −18.514∗ (3.961) −13.130∗ (3.981) −13.751∗ (4.029) Optiplex −17.608∗ (3.760) 45.049∗ (16.573) 29.299 (15.121) 33.222∗ (15.030) Monitor 41.409∗ (16.474) 0.034∗ (0.016) 0.041∗ (0.015) 0.029 (0.016) Warranty 0.044∗ (0.015) 37.371∗ (4.212) 41.376∗ (4.814) 45.476∗ (5.214) Refurbished 35.201∗ (4.102) 17.548∗ (6.834) 15.718∗ (6.567) 14.477∗ (6.532) CD recordable 18.512∗ (6.826) 16.496∗ (4.114) 10.105∗ (3.956) 13.403∗ (4.021) Network adaptor 13.964∗ (3.996) 10.497∗ (4.453) 11.383∗ (4.532) 12.125∗ (4.549) Operation system 10.195∗ (4.399) Seller’s rating 0.000367 (0.000343) 0.000502 (0.000353) 1.131∗ (0.228) Number of bids 1.105∗ (0.229) ∗ 3.942∗ (0.970) Days of offer 3.317 (0.967) Starting price 0.116 (0.061) 0.117 (0.064) Constant 4.915 (23.747) 6.703 (114.499) −43.218 −14.101 (120.101) 0.827 0.829 0.835 0.838 R2 adjusted S.E. of regression 33.729 33.537 32.970 32.658 Log likelihood −3478.661 −3473.612 −3460.548 −3452.805 Note: Same as in Table 3. ∗ Coefficient significant at the 5% level.
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5.2. Results of technical characteristics The most important result is that the processor speed is always statistically significant and positive in every regression. This is mainly because this characteristic is probably the most important in the conscience of the consumers, as it is related to the overall speed of operation. The differences in CPU speed have the largest price effects among all the characteristics, a result that is consistent with the findings of Oliner (1993), Wykoff (2003), and Doms et al. (2004), although they examined depreciation. In addition, CPU type is as important as the speed of the processor. In the sample, there exist four different types of CPUs: Pentium 2, Pentium 3, Pentium 4 and Celeron. Usually Intel discontinues the production of a type when it offers another type in the market. However, there are cases where there exist two different types of processors with the same speed. For example, in the sample, there exist computers with CPU speed at 450 MHz, where some of them are Pentium 2 and the rest of them are Pentium 3. Even though both CPUs have the same speed, there is a huge difference in prices: the computers with Pentium 2 have a mean price equal to $58.79 and those with Pentium 3 have a mean price equal to $93.89. If we limit the sample to those that have 128 MB RAM, then the computers with Pentium 2 cost on average $53.50 and those with Pentium 3 $95.38. We find that the Pentium 2 dummy is negative and significant. In the sample, there are also computers based on the Celeron processor, with a range of speed from 333 to 2400 MHz, which are direct competitors to the remaining processors. We will use as an example computers with CPU speed equal to 1000 MHz. In this particular category, there exist two different types of processors: Pentium 3 and Celeron. The computers with Pentium 3 CPUs cost on average $249.24, while on the other hand those with Celeron CPUs cost on average $187.63. If we limit the sample only to the computers with speed 1000 MHz, memory 256 MB and hard disk capacity 20 GB, then those with Pentium 3 CPUs cost on average $239.17, while on the contrary, those with Celeron CPUs cost $186.99. We get similar results if we make the comparison between Celeron and Pentium 2 or Celeron and Pentium 4 with the same speed. The Celeron dummy is negative in all tests and statistically significant. The next characteristic that we examine is the amount of RAM. We find, as in the CPU speed, that the amount of RAM is positive and statistically significant. Once again, we do not study the quality of RAM. Not all the RAM modules are the same; there are differences in the technology, in the frequency, in the connection type, and in the physical size of the module. Unfortunately, no seller provided this information. However, because each CPU uses a specific type of RAM, we can assume that the qualitative characteristics of RAM are embodied in the CPU type. The third characteristic is the hard disk capacity. In all tests, we find that price increases, as hard disk capacity increases. In the special case that there existed two or more hard disks, we take into consideration the sum of capacities. Again, we have the same problem as before. We do not use qualitative characteristics, such as the revolutions per minute and the transfer rate because they are not reported by the sellers. Most hard disk controllers were IDE and very few were SCSI, which were faster and more expensive. We find that the SCSI adapter dummy coefficient is insignificant. To study the importance of the monitor, we use a dummy with a value of one if the computer was sold with a monitor and zero otherwise. We find that it is positive and statistically significant in all cases. We use dummies because all monitors were 17 , no monitor was TFT, and they were manufactured by Dell, too. The next characteristic is the segregation of computers based on the two families that Dell provides in desktops computers: Dimension, in which belong the computers that are
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focused on home users and Optiplex, in which belong the computers that are focused on offices and small enterprises. The computers of the Optiplex family are better in continuous use, are more reliable, and can be used more easily in a network environment, while on the contrary, the computers that belong to the Dimension family can be upgraded more easily and have better design. The results show that, ceteris paribus, the Optiplex computers are cheaper than the Dimension ones. This may mainly be due to two reasons: first because the former users of the Optiplex computers were mainly firms, and they are more used than the Dimension computers that are mainly owned by home users. Thus, it is likely they have suffered larger deterioration and the expected service life is shorter. The second reason is that the number of Optiplex offered is much larger than the number of Dimensions offered and so the price of the first ones is lower. Another important characteristic is the condition of the computer, i.e. if the computer was refurbished by the Dell. All the parts that do not operate or are very old and have a significant chance to stop working in the short run are replaced with new ones.2 So refurbishment ensures buyers that the computer they have bought has the same quality as a new one. On the contrary, those that are not refurbished, are just checked that they operate (they are not dead on arrival) and in some cases the sellers do not even report if they are working properly. In all tests, the refurbished dummy coefficient is positive and statistically significant, a fact that shows that buyers appreciate the existence of refurbishment. All refurbished computers were sold by Dell; the non-refurbished ones were sold by either second-hand shops or individuals. However, if we examine each of the three different types of sellers, only the computers sold by Dell had a premium. On the contrary, there was no difference in prices between computers sold by second-hand shops and computers sold by individuals. The only difference between the two last groups was that second-hand shops offered warranty, but we control for this variable in our analysis. The overwhelming majority of computers had CD-ROM and this is the reason it is not studied. Perhaps the reading speed might be important, but most sellers did not report the speed, only the existence. We examine the existence of DVD-ROM and CD-Recordable, but we use dummies for the same reasons. Only the CD-Recordable is statistically significant. We also study whether the existence of a modem, network adapter, and zip drive influences prices. The network adapter was standard in most Optiplex models, but it was absent almost completely from the Dimension models. We find that only the network adapter is positive and significant, but the remaining characteristics are not statistically significant. This can be due to the fact that a new modem is very cheap (if it is two or three years old, it is even cheaper), while as long as it concerns zip drive, there are many substitutes in the market nowadays (e.g. flash memory), so it is no longer so essential. An important characteristic of computers is the remaining warranty. There are two types of warranty. The first type is the remaining warranty by Dell that begins the date that Dell sells the new computer, and it might extended. The second type is the warranty that each seller offers, and promises to repair the computer in case there is a problem. It is obvious that the first type of warranty is more important, because it is repaired by Dell technicians and not by another firm. In addition, Dell collects the computer from the owner’s place, while the other companies require the owner to take care of the transportation of the computer to their labs. However, since it was not clear by all sellers if the remaining warranty was offered by Dell or by them, we treat both of them the same. We define as start date of the warranty the date of sale. In all tests, the warranty was positive and significant. The coefficient of the operation system dummy is statistically significant, but its value is quite low. Consumers are willing to pay $10 more to buy an operating system to accompany
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their computers, even though the price of the same operation system if it was sold separately at eBay is much higher. Computers are delivered via post, or via couriers (e.g. FedEx, UPS). There were some cases where the transportation cost exceeded the computer price. We do not study this parameter, because transportation cost does not depend on the computer price, as each seller charges the same transportation cost for each computer he sells. 5.3. Results of auction characteristics Another category of characteristics is related to the auction. These characteristics are the starting price, the number of bids, the seller’s rating as it was announced by eBay, and the days of duration of the auction. If a seller has good reputation, which is indicated by seller’s rating, it means that he has sold many goods in the past without a problem. A buyer is ready to pay a premium to ensure that he will not buy a ‘lemon’. In addition, a large number of bids means that price is higher because of strong demand for the particular computer. More days of offer means that more people will see the offer and so more buyers will bid for it. Finally, high starting price means that the seller probably valuates the computer more. Columns 3 and 4 of Table 3 show that the number of bids and days of offer are positive and significant. Starting price is only significant when we use the simple age function, while seller’s rating is always insignificant, which is consistent with Lucking-Reiley, Bryan, and Reeves (2000).3 The results of technical characteristics are almost the same with the previous regressions, except for the monitor dummy, which is not significant any more, and the Optiplex dummy, which is not significant when we use the simple age function. When we add auction characteristics, age coefficient at Equation (3) becomes significant. However, the sign is positive and it has no economic meaning. 6.
Notebooks
6.1. Results of age effects In this section, we expand our analysis into notebooks. Again, we examine the relation of age and technical characteristics to price, using Equations (2) and (3), without taking into account auction characteristics. Using the whole sample, which includes both new and used notebooks, we regress prices on technical characteristics only to examine if the coefficients are constant for both subsamples. The Chow breakpoint test again rejects the null hypothesis. If we estimate the above equation twice, one for new and one for used notebooks, we find again that the coefficients for CPU speed, amount of RAM and hard disk capacity are statistically higher for the sample of new computers than for the sample of used ones. The next step is to estimate Equations (2) and (3) (without auction characteristics) only for used computers. Columns 1 and 2 of Table 5 show the results with the statistically significant characteristics using White-adjusted standard errors. In both regressions, the age coefficients are not statistically different from zero. Neither for desktops, nor for notebooks, is age significant. Since notebooks are portable and therefore more susceptible to wear and tear, and because the replacement of defective parts is more problematic, we expected that age would have some impact on prices, but it seems that this is not the case. Finally, we examine if there exists multicollinearity between age and the remaining technical characteristics. No coefficient is highly correlated with age; the correlation coefficient between age and CPU speed is −0.78.
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Decomposing prices of used notebooks into age effects, technical and auction characteristics. (1)
(2)
(3)
(4)
Age −0.012 (0.032) −0.203 (0.178) −0.019 (0.030) −0.219 (0.157) 0.000191 (0.000188) 0.000177 (0.000172) Age2 −5.69E−08 (6.93E−08) −4.61E−08 (6.43E−08) Age3 0.137∗ (0.048) 0.156∗ (0.046) 0.153∗ (0.047) CPU speed 0.137∗ (0.047) 0.182∗ (0.021) 0.180∗ (0.021) 0.180∗ (0.021) RAM 0.182∗ (0.021) 2.391∗ (0.614) 1.731∗ (0.525) 1.900∗ (0.505) Hard disk 2.185∗ (0.606) −54.501 (27.972) −41.609 (26.671) −49.706 (29.060) Pentium 2 −54.486∗ (26.679) −41.424∗ (10.646) −40.594∗ (10.817) Celeron −46.204∗ (11.102) −45.725∗ (11.344) Monitor 11.019 (9.696) 12.046 (7.896) 15.376 (10.056) 17.992∗ (8.646) ∗ ∗ ∗ 24.410 (8.753) 31.850 (12.064) 31.858∗ (11.574) Network adapter 25.035 (9.167) 5.042∗ (1.370) 3.821∗ (1.372) 3.522∗ (1.267) Video card memory 5.245∗ (1.300) −0.030∗ (0.011) −0.022 (0.0117) −0.0264∗ (0.011) Weight −0.026∗ (0.012) 0.169∗ (0.035) 0.165∗ (0.032) 0.158∗ (0.034) Warranty 0.173∗ (0.033) 53.395∗ (6.656) 51.887∗ (6.365) 51.824∗ (6.224) Operation system 53.278∗ (6.905) Seller’s rating 0.002197 (0.002386) 0.002570 (0.002292) 0.881∗ (0.199) Number of bids 0.881∗ (0.205) Days of offer −0.151 (5.565) 1.214 (5.268) 0.127∗ (0.055) Starting price 0.127∗ (0.062) Constant 115.890 (128.668) 167.391 (124.953) 15.992 (152.317) 53.590 (143.751) 0.825 0.826 0.831 0.832 R2 adjusted S.E. of regression 41.973 41.881 41.238 41.126 Log likelihood −3081.851 −3079.518 −3069.218 −3066.564 Note: Same as in Table 3. ∗ Coefficient significant at the 5% level.
6.2. Results of technical characteristics Columns 1 and 2 of Table 5 show almost the same results as for desktops. The adjusted R¯ 2 is approximately 0.826 for both equations, exactly the same with the adjusted R¯ 2 of desktops. We find that CPU speed, amount of RAM and hard disk capacity are always positive and statistically significant. Nevertheless, their influence on prices is quite different. From column 2 of Tables 3 and 5, we see that the CPU speed estimator is 0.207 for desktops and 0.137 for notebooks. This means that the implicit prices of CPU speed are 0.21 $/MHz and 0.14 $/MHz for desktops and notebooks respectively. On the other hand, the implicit prices of amount of RAM are 0.09 $/MB and 0.18 $/MB, while the implicit prices of hard disk capacity are 1.26 $/GB and 2.39 $/GB, respectively. While consumers value more an additional MHz of CPU speed for desktops than for notebooks, they value less an additional MB of RAM and an additional GB of hard disk. We find again the same evidence as in desktops that the type of CPU affects prices. The Celeron and Pentium 2 dummy coefficients are negative even though the Pentium 2 dummy is significant only at the simple age function. On the other hand, the Centrino and Pentium 4 dummies are not significant. We expected that one of the most important characteristics that affect the prices of notebooks should be the monitor size. Nevertheless, it is always insignificant (only when we use all auction characteristics and the polynomial age function is the monitor dummy significant). Another important characteristic is the weight of notebooks. Even though few sellers reported the exact weight, it can easily be found at the Dell website. We find that weight is always negative and significant. This is in contrast to Chwelos, Berndt, and Cockburn (2003), who found that weight in a hedonic function for PDAs has positive significance. The main advantage of notebooks against desktops is the fact that they are portable and users
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can carry their notebooks everywhere they go. That is why buyers prefer light notebooks. Ultramobile notebooks, which have inferior characteristics compared with other notebooks, are much more expensive. The family of notebooks is not as important as in desktops. The Inspiron dummy is never significant. Inspiron notebooks are focused on home users, while Latitude notebooks are focused on firms. As in desktops, we find that the modem, DVD-ROM and CD-Recordable dummies are not significant, even though they are always positive for the same reasons as before. We again find that the network adapter is always positive and significant. Warranty (either by Dell or by the seller) is again always positive and significant. The coefficient for notebooks is much larger than that for desktops. If a component of a desktop fails, most people can easily replace it on their own. Unfortunately, even the simpler damage to a notebook cannot be repaired by its owner and only specialized technicians can repair it. Therefore, the warranty is much more important for notebooks than for desktops. The dummy for operating systems is always positive and significant, as in desktops. Nevertheless, the value of the coefficient is five times larger than that for desktops, a fact that indicates that consumers value more the existence of an operating system more for notebooks. Finally, we examine the graphic capabilities of notebooks by adding into the hedonic function the amount of video card memory. As we expected, the coefficient is positive and significant. Conclusion, we observe that even though CPU speed, amount of RAM, and hard disk capacity remain the main specifications of notebooks that affect prices, there are also some other significant characteristics such as weight and video card memory that do not exist for desktops. 6.3. Results of auction characteristics The results are almost the same as the results for desktops. These characteristics should not depend on the object of the transaction and our results confirm it. Starting price and number of bids are always positive and significant, while seller’s rating remains insignificant. The only change is that days of offer are now insignificant because almost 96% of the transactions had three days duration. 7.
Price differentials between new and used computers
Using the above results, we will explain the reasons for the significant price differential between new and used computers. These reasons were discussed in Section 3, and include age effects (physical deterioration), differences in technical characteristics, age-zero price decline, and differences in retailer characteristics. The last category is quite difficult to identify, since used computers are sold through an online auction marketplace, and new computers are sold directly by the website of Dell. Because our results of auction characteristics cannot be used on new computers, these effects will be included in age-zero price declines. A consumer values more the technical characteristics of a new computer than those of a used one. Thus, if we use the same values for technical characteristics and age at the two hedonic functions, the estimated price of new computers would be higher. This price differential, which is adjusted for technical characteristics and age, is caused by the premium that consumers pay for new computers (and other factors, such as differences in retailer characteristics). We estimate this price difference by subtracting the estimated hedonic price of a new computer using the coefficients of the hedonic function for used computers, from the actual price. Since the coefficients of the hedonic function for used computers are lower
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$1000 $800 $600 Age-zero price decline Technical characteristics Age effects
$400 $200
Actual price
$0
6–6.5
5.5–6
5–5.5
4.5–5
4–4.5
3.5–4
3–3.5
2.5–3
2–2.5
1.5–2
1–1.5
0.5–1
New
0–0.5
–$200
Figure 4. Decomposing prices of used desktops into age effects, technical characteristics and age-zero price decline. Note: Age is measured in years.
than those for new computers, this price differential is positive. We estimate that the mean actual price of new desktops is $890.18, while the estimated mean hedonic price using coefficients of the hedonic function for used desktops is $673.48. The price differential, which is our estimation of age-zero price decline, is $216.70. For new notebooks,4 the mean actual price is $1272.78, the estimated mean hedonic price is $1018.91, and the price differential is $253.86. Thus, used desktops are sold 24.34% cheaper than new desktops with the same age and technical specifications; for notebooks, the discount is 19.94%. Next, we estimate the price declines that are caused by age effects and technical characteristics. Again, we use the coefficients of the hedonic function. Figure 4 summarizes the full decomposition of price declines. Actual prices are the same as in Figure 3. Age-zero
$1400 $1200 $1000 $800
Age-zero price decline Technical characteristics Age effects
$600 $400 $200
Actual price
5.5–6
5–5.5
4.5–5
4–4.5
3.5–4
3–3.5
2.5–3
2–2.5
1.5–2
1–1.5
0.5–1
0–0.5
New
$0
Figure 5. Decomposing prices of used notebooks into age effects, technical characteristics and age-zero price decline. Note: Age is measured in years.
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price decline is equal to $216.70 for all used desktops. Age effects are a linear function of age, because we use the simple age function. The impact of physical deterioration is positive (prices increase with age), because the age coefficient at the hedonic function is positive, even though it is not statistically significant. Nevertheless, differences in technical characteristics have the largest impact on price declines. Figure 5 shows the same decomposition for notebooks. Actual prices are the same as in Figure 3. However, since actual prices decline at a much more moderate rate, agezero price declines and declines due to differences in technical characteristics are lower. Price declines due to age effects are again a linear function of age, but now its impact is negative, because the age coefficient at the hedonic function is negative. Again, differences in technical characteristics are the most important factor for price differential between new and used notebooks.
8. Conclusions This paper explains why used computers are much cheaper than new ones. We obtained data for 876 used and new desktops and 761 used and new notebooks from eBay auctions and the Dell website. The information included was price, age, technical specifications and auction characteristics. Then we regressed prices on the above set and obtained estimations about the factors that were responsible for the price differential. The price of a typical used desktop that is sold at eBay is approximately 21% of the price of a new one. We estimate that this is mainly due to differences in technical characteristics and age-zero price declines, while effects of physical deterioration (wear and tear) are negligible. The age-zero price decline, i.e. the drop in price when the computer is sold for the first time, is about 24% for desktops and 20% for notebooks. The remaining price differential is due to inferior technical characteristics. The rapid technological progress is pushing prices of used computers down. The CPU speed and type have the largest price effects among all the characteristics, while RAM, hard disk capacity, and warranty are also very significant. On the other hand, age effects are not significant, and two computers with the same specifications, but with different production date, should have almost the same price. We also find that characteristics of auction are also significant and computers with higher starting price and more bids are more expensive. The results show that age is not so important for personal computers as for other capital. Used computers can do exactly the same things as when they were new as long as age does not alter overall speed and reliability of a computer. Our results are consistent with Geske, Ramey, and Shapiro (2004), even though our sample had not observations from different time moments, so we could not study the revaluation effect. Unfortunately, we could not study the revaluation effects, due to lack of data for previous periods. An interesting field for further research would be the examination of revaluation effects combined with differences in technical characteristics and age effects to get the full story. Also, further research should examine all brands of PCs and not only Dell computers, as we did.
Notes 1. 2.
Hulten and Wykoff (1996) pointed that new vintages does not reduce the productivity inherent in existing assets. As Dell declares in its website (accessed February 2007):
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While only a small fraction of this equipment is returned because of technical issues all systems are put through the production process again. They are taken apart and rebuilt to original factory specifications, then retested to ensure the same quality and award winning workmanship standards as new. We even use brand new boxes for packaging! Because our systems are refurbished and then retested to meet Dell’s high quality standards, we offer the same limited warranties as the new systems. Dell has achieved the industries highest awards for customer service and customer support, and we include the very same service and support levels with each Dell Outlet system we sell. Additionally, if you are an existing customer for any new Dell system purchase, your customer service and technical support remains the same. With every Dell Outlet computer you purchase, you receive the same award-winning technical support that comes with each new Dell system – 24 hours a day, 7 days a week. 3. Lucking-Reiley, Bryan, and Reeves (2000) found that the effect of negative feedback is statistically significant at the 5% level, while the effect of positive feedback is not. We use the overall rating of the seller (positive minus negative votes). 4. We exclude notebooks that are based on the Pentium M processor, since there is a comparison problem between the speed of these CPUs and the other ones.
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