. "4 Evolving Market Baskets: Adjusting Indexes to Account for Quality Change." At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: The National Academies Press, 2002.
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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
Some of the distinctions between cases can be clarified by casting them in this repackaging framework (this idea dates back at least to Fisher and Shell, 1968, 1972). This framework deals with situations in which the amount of “good” in the good has changed. It is difficult to think of actual examples other than changes in package size that correspond exactly to this framework, but imagine that gasoline has been improved so that it gives a 25 percent increase in miles per gallon for all vehicles and is otherwise unchanged. Once again, the solution seems fairly clear: the real price has fallen by 20 percent from, say, 5 cents to 4 cents a mile. One useful way of thinking about this is that the good is not gasoline but miles from fuel, and the price of the latter has fallen by 20 percent. Another example might be a new razor that yields more shaves before becoming dull. These cases converge with the butter case when one shifts from thinking of gasoline or razors to thinking of a good that more directly relates to consumer welfare. Once the good is defined appropriately—which is not trivial—and one thinks of the market good as a repackaged real good, the right way to handle quality change becomes transparent.
The basic idea applies to more complicated cases, though the practicalities get harder. In most cases, there is no single obvious quantitative metric (like miles per gallon or number of shaves) to use in redefining the package, which makes it difficult to identify a simple one-to-one relationship between the real goods and the market goods. Economists and marketing specialists often think of situations of this sort in terms of characteristics, with market goods consisting of various combinations (packages) of several characteristics. Since one often does not really know the characteristics—because each good has many and because there is often no nonarbitrary way of defining them—things are rarely as simple as in the gasoline case, let alone the butter case. It is conceptually useful though to think of approaches such as hedonic techniques, which we discuss in detail below, as an attempt to redefine goods so that, by repackaging, one can factor out quality change.
The really hard cases occur when a new good introduces new characteristics, in which case the repackaging idea cannot help with measuring quality change. But it is unclear that any practical technique can help in these cases or, indeed, whether radically different goods can even be appropriately discussed in the context of price measurement. For instance, in no clear sense did the introduction of cellular telephones reduce the general price level. Yet that new product did increase the well-being achievable by a subset of the population for a fixed money outlay and, in that sense, reduced the cost-of-living.
Our coverage of the quality change/new goods problem follows the taxonomy outlined by Armknecht et al. (1997). First, we contrast the nature of the problem as it arises in the COGI and COLI contexts. In the next three sections, we sort though the gradations of quality change that occur along the repackaging spectrum. This discussion includes a brief review of the evidence of CPI bias presented by the Boskin commission (Boskin et al., 1996) as well as a discussion