that weights associated with the relevant set of categories account for about 40 percent of the CPI, which yields an overall index bias of 0.1 percentage points (0.4 × 0.25) per year. The Boskin commission adopted this estimate in its categorical reporting of CPI outlet bias. Given the absence of alternative evidence, it is hard to fault this choice, but the quantitative effect of outlet substitution remains unclear. Fixler (1993) notes that comparisons between the movement of average prices (as used by Reinsdorf) and the CPI strata counterpart do not provide direct evidence of the outlet effect because “differences in index formula, in treatment of product quality change, and in coverage of average prices and CPI strata indexes” may also play a part in the divergence of the two series (p. 8).

MacDonald and Nelson (1991) also produced a rough estimate of the bias created by the market shift to discount stores by combining information on prices across outlet types and market shares. At the time of their study, data published by the trade journal Progressive Grocer indicated that prices at warehouse food stores were 13.4 percent lower that at traditional outlets. The lower prices, along with a 0.7 percent annual growth of warehouse store market share, imply a non-quality-adjusted 0.1 percent per year index bias. Any quality adjustments in favor of traditional outlets would reduce the bias. Also, bias estimates implied from market share information may be overstated if consumers who preferred traditional outlets are forced, because of the outlets’ extinction, to patronize the less desirable superstores. A full estimate of outlet bias would have to consider the increased quality-adjusted price that traditionalists must now pay.

Estimating the Real Component of Price Differences Across Outlets

To accurately remove outlet substitution bias from a COLI, an index producer must abandon the assumption embedded in either extreme position—that any observed price difference of an identical item at two outlets (1) is wholly attributed to outlet-related quality differences valued by consumers or (2) contains no quality component and therefore reflects pure price variation. In order to escape these assumptions, methods would have to be developed that isolate and quantify the value to consumers of the service, time, and other quality dimensions that differ by outlet type so that the pure price component could be identified. That is, differences in observed price changes associated with outlet-rotated items must be broken down into price and quality components, as is done for items whose embodied characteristics change.23

23  

Dennis Fixler (who, at the time, was at BLS) informed the panel that the producer price index (PPI) program has begun investigating approaches that would treat retail services in the grocery store component explicitly. Fixler’s assessment is that “to date, they have not been successful in linking changes in outlet characteristics such as number of cash registers or the number of stock keeping units (as a proxy for the scope of products available) to changes in the retail margin—the measure of price for retail services.” He notes that work is also under way to examine links between CPI-collected prices and sets of outlet characteristics (personal communication).



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