Product Heterogeneity, Price Index Bias, and Their Link to Provincial Urban Size: Evidence from Urban China’s Beverage Market

Conventional price indexes partially address product heterogeneity. This paper considers the variety and quality of products in each market, the combination of region and year, and constructs panel price indexes using household scanner data on non-alcoholic beverages in urban China. By comparing our panel price indexes to a conventional one, we find that ignoring product heterogeneity could largely underestimate the cross-market price differences for non-alcoholic beverages. We also find that product variety increases with urban population and income per capita, but that quality decreases with urban population, suggesting that wealthier provincial urban markets tend to have higher consumer welfare.