prices.11 Since pricing early in goods’ life cycles may be atypical in different ways, the effects of the loss of information on pricing during an inevitable period of delay are, at least in principle, indeterminate.12

At a cost, criticisms by the Boskin commission and others could certainly be addressed. New goods could be introduced into the index earlier so as to catch a larger portion of postintroduction price trends; growing sales can be captured by more frequent weight updating. This panel agrees that, other things being equal, more information is better than less. Hence, new commodities should in principle be introduced into the CPI as soon as they become significant in the marketplace. Such an approach would require frequent sample rotation to capture new supplemental goods and more frequent revision of the item classification structure to capture radically different goods.

Unfortunately, other things would not be equal. Survey-based updates of expenditure weights and product samples are expensive to produce and require time to compile. When a new commodity is introduced into the base without new household expenditure information, other complications arise: Should all the old expenditures simply be scaled down proportionally to make room for the new expenditure share? Or should the expenditure shares of commodities that are apparently the closest substitutes for the new commodity be reduced somehow to make room for the new expenditure share? Again, this depends in part on how the new good enters the index.

As noted above, some items, such as VCRs, only enter during item reclassification or, like Viagra, from an ad hoc targeted initiation. However, the majority of supplemental and new items are identified in the Telephone Point of Purchase Survey (TPOPS, the 1998 revision of the POPS) and enter the CPI during sample

11  

Economic theory can illustrate cases for which “profit skimming” may make sense and others where penetration pricing does, Kalish (1988). Berndt et al. (1993) observed that the product life-cycle pricing path for prescription drugs typically shows relative declines for about 6 years but, after that point, prices significantly increase, such that the prices of older drugs increased more rapidly than the prices of newer drugs.

12  

The 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. They were able to gather data for 62 “product forms” covering 4,000 brands from 264 comparative products. The mean price for each product group was traced over time. They found, among other things, that 85 percent of the product prices exhibited negative trends. Tested at the 10 percent level, 56 percent of the products had significant negative trends and only 2 percent had positive trends. But (1) all of the products were goods and, at least from 1958 through 1980, goods, prices fell relative to service prices, and therefore relative to the CPI; and (2) the Consumer Report studies were not confined to “new” products. The authors concentrated on branded products and had a heavy preponderance of appliances and traditional electronics (radios, TVs, audio speakers, etc.) for which one might expect theory to apply more than, say, for new medical procedures.



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