In this example, the value of time, which varies from one consumer to another and which must enter a full-blown COLI concept, becomes a relevant issue since choices relating to it can affect the index. Consider, for instance, that different consumers pay different shipping rates for the same product from the same outlet. Some customers choose to pay an extra $3 to have one CD delivered overnight; others pay only 10 cents for shipping because they order 20 CDs at the same time and choose 2-day ground delivery. Are these consumers paying different prices for the product, or are they paying for time savings or for additional services that contribute in combination with the primary item to their utility? The customer selecting overnight delivery reveals not that he would rather pay $19 than $16 for a CD, but that there is another element besides eventual ownership that affects his well-being. By extension, if everyone changes from buying CDs at the superstore to buying them from the Internet store (and sample rotation reflects this), the price index should not automatically rise (and it wouldn’t under the current linking procedure). However, problems could arise if there is a shift in available delivery options or consumer choices. Say, for example, that BLS originally prices CDs delivered by 2-day mail. Now assume that the Tunes.com upgrades its delivery service by replacing 2-day delivery with overnight delivery without raising prices. If no quality adjustment is made when CD purchases under the new setup are priced, the index would miss a true price decrease. This would clearly be incorrect from a COLI perspective (and, depending on how the good is defined, probably also from a cost-of-goods index [COGI] perspective). The problem could arise if item acquisition cost is not treated in a consistent manner—that is, if in some cases it is left out and in others it (or part of it) is included.

The big question is whether or not any of these outlet effects are quantitatively important to index performance. At present, it seems unlikely, but conditions are changing. For instance, market boundaries are rapidly expanding, which might minimize (or exacerbate) the price dispersion problem. By reducing information and search costs, the Internet may one day make the law of one price assumption less unrealistic. The Internet allows consumers access to a vast amount of product information that enables them to easily shop for the lowest price; this visibility also puts pressure on retailers to match competitors’ prices. Fuller information and global access mean that indexes for, say, San Francisco and Milwaukee might converge toward the national average. Consumers now have fuller access to product specifications and worldwide price information than ever before. Even consumers who ultimately patronize only brick-and-mortar outlets can save time gathering price and product information. The cost of making informed decisions about purchases has decreased; the chance of purchasing at a noncompetitive price has been reduced. The former effect (cost of information) is not captured in current CPI methods; the latter effect (lower price) probably is.

To the extent that e-commerce forces competition, differential price trends for specific geographic areas may be minimized. As such, the increase in e-



The National Academies | 500 Fifth St. N.W. | Washington, D.C. 20001
Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement