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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
designed to make the index reflect changing consumer shopping patterns—that is, to collect prices from the places where consumers shop most. Item rotation and outlet rotation occur simultaneously; as a new outlet rotates into the sample, so too do many new (to the index) products. A new product is introduced to cover the same market basket category (for instance “records and tapes”) as that which was sampled at the outgoing outlet, but whether or not the same specific item type (say, a CD) that was previously priced remains in the sample depends on expenditure shares at the new store in conjunction with the random selection component of the rotation procedure.
In the previous section we addressed difficulties that arise when sales-based outlet and item selection require BLS to compare newly sampled, non-identical items with those that have been replaced from the outgoing outlets. However, a different issue arises when, after outlet rotation, a specific product from the old outlet sample also appears in the new outlet sample but at a different price. Because of the expenditure-based sampling process, products with high market share and high sales volume are particularly likely to be reselected through successive outlet rotations.16
Outlet substitution expands the scope of index coverage beyond that represented by specific items, incorporating the notion that, in acquiring goods and services, aspects other than price may affect a consumer’s cost of living.17 When consumers purchase a good at a particular store they are buying a package. The package includes not only the specific item but also the quality of the shopping experience—the services provided, the store’s locational convenience, its return and exchange policy, and the variety of products available. In this context, the issue of the value of time naturally arises. As it relates to consumer shopping, and specifically outlet-use patterns, valuing nonmonetary benefits associated with time savings, improved convenience, or better service is central to the concept of a COLI. Treatment of the issue should distinguish between time as (1) a variable that (perhaps combined with transportation costs) might be used to help explain differential outlet quality and (2) any explicit imputations of the value of time spent shopping (perhaps corrected for any entertainment component of the activ-
The outlet effects discussed in this chapter may also be relevant when sample rotation leads to the selection of a non-identical item. However, it is instructive to begin with the easier “all-else-equal” case when prices of identical items are compared, because it allows one to abstract from the item quality problem. Conceptually though, any remedies to outlet bias might apply to the non-identical items case.
A textbook Laspeyres index might avoid this issue since, strictly speaking, pricing a fixed market basket requires selecting the same goods from the same outlets over comparison periods. In a rapidly evolving economy, it is worthwhile to sidestep such a restrictive practice. Failure to rotate outlets allows the index to drift further and further away from reflecting trends in transactions prices—the prices people actually pay at the outlets where they typically shop. That is why the BLS and virtually all statistical agencies in other countries choose to modify their Laspeyres indexes to allow for periodic updating of the sample of outlets from which prices are collected.