. "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
drawn, deletion is the most prevalent method used by BLS to address non-identical item replacement in the index (Kokoski et al., 2000:3). If the outgoing item is last seen in period t - 1 and the new item appears in period t, the old item will be used in index adjustments up to the one made from period t - 2 to period t - 1. The new item is used for the adjustment from period t to period t + 1 and thereafter. For period t - 1 to period t, change in the index component is proxied by the observed price change of other goods in the same CPI item stratum.
The traditional (non-class-mean) deletion method assumes that the pure price change from the replaced to the replacement item is the same as that for the composite of all other goods in the class. Any remaining portion of the price change observed for the good in question is attributed to quality factors. The direction and extent of residual quality biases associated with this method are disputed, but they essentially hinge on whether the “true” quality-adjusted price change for the item that changed is greater than or less than the measured price changes of the same-class items that were used in the imputation (Triplett, 1997:29).
Triplett and some BLS researchers have argued that deletion can inappropriately attribute a portion of price changes to quality change and, therefore, lead to overadjustment (downward) of price quotes. Their argument is based on the observation that manufacturers are, at least in some sectors, more likely to change prices when a new model is introduced.11 In an extreme case, if prices changed only when models did, a deletion-based index would pick up no price change at all. Triplett’s suspicion of a downward bias is corroborated by Moulton and Moses (1997), who demonstrate that a disproportionate number of price quote changes do in fact occur when new models or varieties of certain goods are introduced. It follows that, if the prices of unchanged models are the only ones that count, as is the case with the standard deletion, the method would impart a bias. Comparative hedonic studies have also indicated a downward bias associated with deletion (e.g., Liegey, 1993).
Prior to the Moulton and Moses (1997) work, the Boskin commission arrived at a different conclusion—that the bias is likely to be upward—stating that the deletion method “bases price change on models that are unchanged in quality and may be further along in the price cycle (Boskin et al., 1996).”12 It is worth noting that nothing precludes the coexistence of both the type of bias that Moulton/ Moses detected and the type that Boskin hypothesized.
Research performed by the BLS indicates that producers frequently take the
BLS research showing that price increases tend to coincide with the roll-out of new models is best documented for the apparel and upkeep strata; see Armknecht and Weyback (1989), Liegey (1994), and Reinsdorf et al. (1996).
The underlying assumption here is that product prices drop, or rise less rapidly, immediately after a new product’s introduction into the market. This assumption has undoubtedly been true for computers and electronic devices in general but is less clear for other categories of goods and services.