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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
for point-of-introduction bias would be a good idea even if the practical estimation problems could be solved. Proponents of more traditional price index methodologies argue that it is a perversion of the language to argue that the effect of, say, the introduction of cell phones or the birth control pill is to reduce the price level, a result that comes from confusing the concept of a price level with that of the cost of living. Their position is tempered somewhat by the realization that, outside of price measurement, there is nowhere else in the national accounts for such product quality improvements to be included and, as Nordhaus (1998) and others have argued, real growth in the economy is thereby understated. Additionally, modern economic growth appears to be more quality intensive than quantity intensive, and the statistical system is not keeping up with the change. However, the panel as a whole agrees that adjusting the CPI is not the way to correct the situation. Rather, research in this area should be directed toward developing a separate experimental COLI that is adjusted, to the extent possible, to account for changes as new products and technologies diffuse throughout the economy.
Criteria for Introducing New Goods
Under traditional procedures, a new (nonreplacement) good is linked into the CPI in such a way that its introduction, in and of itself, has no effect on the level of the index. Once in the index, price change of the new item affects index growth in the normal fashion. However, in addition to the point-of-introduction price reductions discussed above, price trends over the interim period between product appearance and introduction to the index also go uncaptured. Thus, a second problem—that of how quickly new goods are brought into the index—exists if early price-cycle patterns are consistently different from general price trends. If a new commodity is a reasonably close substitute for an existing one and is likely to replace it in the marketplace, then instead of explicitly revising the base market basket, one could think of simply replacing the old commodity in the index with the new commodity, after some adjustment for quality change. This is not very different from the within-sample replacement that occurs when an outlet sample item disappears.
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. A Laspeyres index that has period 1 as its base will weight the long-term price relative for the new good by its period 1 market share, which will often be much smaller than its period t market share for t > 1. Note that this period t market share