At What Price? Conceptualizing and Measuring Cost-of-Living and Price Indexes (2002) / Chapter Skim
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5 New Goods and New Outlets
5 New Goods and New Outlets
Pages 155-177
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From page 155... ...
Routine price collection procedures continually lead to instances in which BLS has to find replacements for items that have disappeared. Similarly, when BLS rotates its sample of retail outlets, it picks up products that are different from those it had been pricing in the old stores.1 Products also appear that are novel to the point that there is no place in the CPI 1 Unlike the process in which items are substituted in stores, outlet rotation can introduce "supplemental" goods, such as a new cereal or a generic drug, which do not replace any particular item but do fit into an existing entry-level item (ELI)
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From page 156... ...
those that might be picked up during sample rotation (in which case items enter using overlap pricing, where there is no comparison to a previously priced good and, hence, no quality adjustment)
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From page 157... ...
The CPI as currently estimated by the Bureau of Labor Statistics (BLS) does a reasonable job of accounting for price changes and has begun to attempt to include quality changes.
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From page 158... ...
The introduction of a new good, and its later diffusion to its ultimate customer base as more consumers learn about it, may be thought of as a series of price reductions. A demand curve that traces the "virtual" prices that some consumers would have been willing to pay for the good can, in theory, be econometrically estimated.6 If significant numbers of new goods are continually invented and successfully marketed, an upward bias will be imparted to the overall price index, relative to an unqualified COLI (though this effect may be partially offset by a downward bias created by the disappearance of goods)
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From page 159... ...
His article concludes that introduction of the new cereal variety hardly a radical expansion of consumer opportunities created substantial consumer benefits (defined by the difference between the virtual price for the cereal minus the introductory price) , sufficient on its own to have reduced the average rate of price increase in the CPI component for breakfast cereals significantly (Hausman, 1997:229, 234~: .
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From page 160... ...
new goods than poor consumers. Hence, incorporating virtual price reductions into a plutocratic index may have a greater effect than they would if incorporated into a democratic index.
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From page 161... ...
For more novel introductions, a new commodity must be brought into the index as part of a revision to the market basket; that is, when the statistical agency switches from the old fixed-basket Laspeyres index to a new fixed-basket Laspeyres index that has a more recent period as its base and includes the commodity. There may still be a problem with use of the latter in comparison with a superlative index because of the properties of new product price cycles.
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From page 162... ...
, for instance, has stressed producer efforts to penetrate markets with low introductory 1OAs discussed in Chapter 2, the Paasche and Laspeyres indexes are both valid measures of price change between periods. If only one measure of overall price change is required, it can be argued that an average of these two indexes, such as the Fisher ideal index, which takes the geometric mean of the two indexes, offers a sensible approach.
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From page 163... ...
12The research literature does not offer much empirical evidence on new product price trends, specifically whether falling prices are characteristic of products in the early stages of their life cycle. Curry and Riesz examined Consumer Reports test studies that covered five or more brands during the period 1961 through 1980.
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From page 164... ...
Item strata correspond roughly to the TPOPS categories. If new items encountered in the sample rotation process fit existing ELI definitions, they can be readily brought into the CPI through overlap pricing, since new and old items are both available in at least one period (in which case the base period price difference between the new and old items is implicitly treated as completely due to quality differences)
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From page 165... ...
As noted above, BLS must also deal with the class of product introductions that are not picked up during normal sample rotation. If a new item is encountered that does not fit an existing ELI definition and is not obviously a close substitute for one that does but does fit within an existing item stratum, the remedy is to define a new ELI.
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From page 166... ...
BLS's work in this area is commendable, and BLS should continue to develop changes in its procedures designed to reduce those delays substantially.l4 When visible items, such as home computers and VCRs, that achieve significant expenditure shares can be brought into the item samples rapidly, public and policy maker confidence in the CPI and the BLS can only be improved. While the effect of earlier inclusion of any one product is expenditure weights attached to the categories of goods and services comprising the CPI." The year of a revision is identified when the new market basket introduction occurs as such, the most recent "major revision" is usually identified as the 1998 CPI revision.
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From page 167... ...
Thus, there may be a tradeoff between timeliness and accuracy of item weights. For many cases, it may only be practical to introduce new items into the sample rotation after a significant and estimable market share emerges.
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From page 168... ...
However, a different issue arises when, after outlet rotation, a specific product from the old outlet sample also appears in the new outlet sample but at a different price. Because of the expenditure-based sampling process, products with high market share and high sales volume are particularly likely to be reselected through successive outlet rotations.l6 Outlet substitution expands the scope of index coverage beyond that represented by specific items, incorporating the notion that, in acquiring goods and services, aspects other than price may affect a consumer's cost of living.l7 When consumers purchase a good at a particular store they are buying a package.
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From page 169... ...
To illustrate, consider a situation in which rotation from outlet A to outlet B yields a lower observed price for a 12-ounce tube of Crest toothpaste but the same price for a 48-ounce container of Tide laundry detergent. If the lower price of toothpaste is attributed to inferior outlet quality (which requires implicitly adjusting the new price upward to match that from the old outlet)
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From page 170... ...
This potential bias affects major CPI item categories, including food and beverages and apparel, although other categories most notably housing are not affected by outlet substitution. The fact that the market share of low-price discounters has been steadily growing implies that, even after quality adjustment, prices at those stores are lower than elsewhere.
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From page 171... ...
To illustrate one dimension of the story item acquisition consider the example in which, in period one, a compact disk costs $16 at the local record store. In period two, after outlet rotation, a Tower Records superstore that sells the same compact disk for $15 replaces the local store in the sample.
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From page 172... ...
If no quality adjustment is made when CD purchases under the new setup are priced, the index would miss a true price decrease. This would clearly be incorrect from a COLI perspective (and, depending on how the good is defined, probably also from a cost-of-goods index [COGI]
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From page 173... ...
Evidence of Outlet Bias The research attempting to estimate the extent of outlet substitution bias is thin.22 Reinsdorf's 1993 study, probably the most cited on the topic, formally outlines the underlying theory and offers empirical evidence that outlet price differentials are at least partly real rather than merely reflective of quality differences. Reinsdorf whose research served as the basis for the Boskin commission's outlet substitution bias estimates compared food and motor fuel prices from outgoing and incoming samples during a 2-year overlap period when samples were being rotated.
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From page 174... ...
Estimating the Real Component of Price Differences Across Outlets To accurately remove outlet substitution bias from a COLI, an index producer must abandon the assumption embedded in either extreme position that any observed price difference of an identical item at two outlets (1) is wholly attributed to outlet-related quality differences valued by consumers or (2)
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From page 175... ...
However, work in this direction is embryonic and applicable results appear to be a long way off. This type of hedonics may be even more complex than in the standard quality adjustment context since such an analysis would need to "allow for the existence of temporary market disequilibria and a distribution of preferences across consumers" (Reinsdorf, 1993:250~.24 And the problem of identifying outlet characteristics that are tied to consumer valuations of service is certainly conceptually no simpler than in the parallel item quality case.25 Because any attempt to control for price changes attributable to item and outlet characteristics would require collecting detailed data, scanner technology may offer some hope for advancing research on outlet substitution bias.
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From page 176... ...
However, in principle, when outlet rotation results in a change in the observed price of an identical product, an attempt should be made to decompose the difference into quality (or convenience) and pure price components, instead of attributing it, in its entirety, only to the former.
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From page 177... ...
NEW GOODS AND NEW OUTLETS 177 As with product-based hedonic techniques, substantial methodological and data advances would be needed before any such changes to the CPI could be put into practice. Undertaking this approach would require BLS to intensify research on consumer search costs, time use, service valuation, hedonic methods applied to outlet characteristics, and, more generally, how to adapt sampling methods to facilitate more extensive quality adjustment across item rotations.
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