item structure to accommodate them: cell phones, home computers, and VCRs are examples.2 These are products whose characteristics would be difficult to “repackage” (in the sense discussed in Chapter 4) into existing goods and services no matter how broadly definitions are drawn. Without an explicit decision to change the list of goods to be priced, standard indexing procedures will not pick up any of the effect of such newly introduced items on consumers’ living standards or costs.3

These contrasts notwithstanding, no sharp dividing line separates a new good from a quality improved product. What can be cleanly distinguished are situations that lead to within-sample item replacement and those involving a good or service that has entered the market but would never be brought into the index as part of the in-store pricing process. New items falling into this second category include (1) 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) and (2) those that can only be brought into the index when item strata are redefined and the sample reset. The previous chapter primarily addressed shortcomings in the process for dealing with quality adjustment of replacement items. However, failure to capture price (or cost-of-living) effects associated with new nonreplacement products may, depending on the objective of the index, cause what Triplett (2001b) has termed “new introduction bias.” This failure is not a quality adjustment problem but a sampling one—a case in which rapid product turnover, caused by technological or other changes, leaves the item sample no longer representative of what people buy (Triplett, 2001b:19-20).

The appearance of products that can only enter the index after item reclassification (and, to some extent, those that enter during sample rotation) raises two issues beyond those associated with routine item replacement. The first is what to do to account for price effects that occur during the period in which a new product appears on the market. Specifically, should a price or cost-of-living index reflect the fact that new goods typically enter the market at a price that is below that which would have reduced demand in the period prior to its introduction to

2  

There are gradations of incompatibility with the CPI item structure. Some new products might fit into an existing item strata but not into any of the more specific ELI definitions. In this case, a new ELI can be created, and the new product brought in gradually through sample rotation. Other products are so different that they can only be incorporated into the index by revising the CPI item classification structure.

3  

Recent technological innovation has introduced some goods that are, relative to the VCR-type examples, even more difficult to assess. For instance, e-mail has certainly affected people’s communication behavior, but it is hard to place a value on it or ascertain its price (even for a single household). What percentage, if any, of Internet access and provider fees, or even of a computer purchase, would be assigned to the “price” of e-mail.



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