choices. It is well documented that general shifts in shopping habits—specifically, the move from higher-priced full-service outlets to discounters—have occurred. For instance low-price and expanded-format food stores grew from a 31 percent to a 50 percent market share between 1979 and 1988 (Reinsdorf, 1993:228), and discount outlets have permeated well beyond food sectors, into electronics, computer equipment, home improvement, and others. Under the prevailing methodology, a large shift in the types of outlets that consumers choose to patronize does not directly affect the index trend, since all price change arising from rotation is linked out. This potential bias affects major CPI item categories, including food and beverages and apparel, although other categories—most notably housing—are not affected by outlet substitution.

The fact that the market share of low-price discounters has been steadily growing implies that, even after quality adjustment, prices at those stores are lower than elsewhere. If through economies of scale and other means, the large-volume retailers have been able to provide lower prices to a growing number of consumers for the same quality-adjusted goods, the current procedures bias the CPI upward (as a cost-of-living indicator). At the same time, a minority of consumers who would have preferred to continue shopping at traditional stores found them driven out of business by the new outlets; those consumers experience an increase in their living costs.

New outlet bias is lessened to the extent that low pricing at new outlets forces established ones to follow suit while they are still in the CPI sample. Depending on the timing of store pricing responses and outlet rotation, the CPI may capture such a price decline. If the now relatively less frequented outlets that BLS used to sample began lowering prices before they were rotated out, the price pressures created by the new outlets would be captured.20 In fact, within the economic model of perfect competition, lower prices would, in equilibrium, be balanced by poorer quality. If equilibrium were always maintained, there would be no potential for this type of bias. However, it appears that the shift to new outlet types has been an ongoing process that is still continuing. As new outlets open, consumers in the area gradually change their shopping behavior and take advantage of the lower quality-adjusted prices.

The recent emergence of e-commerce (the business-to-consumer component) has the potential to create another disequilibrium situation. Expenditure and sales data indicate that consumers are purchasing a small but rapidly increasing share of goods and services through Internet retailers. BLS is planning to rotate these outlets into its sample more or less according to standard protocol. Current CPI procedures for determining where consumers shop should capture increased

20  

Likewise, as Shapiro and Wilcox (1996) point out, the potential for upward outlet bias is also reduced when established outlets respond to price competition by reducing the quality of their service.



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