Much of Consumer Price Index (CPI) inflation for consumer durables reflects shifts to newer product models that display higher prices, not price increases for a given set of goods. I examine how these higher prices for new models should be divided between quality growth and price inflation based on (a) whether consumer purchases shift toward or away from the new models and (b) whether new-model price increases generate higher relative prices that persist through the model cycle. I conclude that two-thirds of the price increases with new models should be treated as quality growth. This implies that CPI inflation for durables has been overstated by almost 2 percentage points per year, with quality growth understated by the same magnitude.

In standard pricing models, movements in demand are partially offset by price responses. In a customer market, however, price markups may decrease with high demand. Thus, price may magnify, rather than stabilize, demand movements. I consider a monopolist selling a good of which first-time consumers are uncertain. Repeat customers know that the product works. The monopolist trades the objec-tives of exploiting past customers and attracting new ones. In a period with many new potential customers, the monopolist gives more weight to attracting and lowers its markup. Last, I examine some evidence on whether expansions are periods with disproportionately many new customers. I.