the market at a high price, and they have a low volume of sales. Then for some time the price will tend to fall and the market will expand rapidly, until the new good becomes a mature, established product. For some new goods, however, producers follow a different strategy, introducing the new good at a low price in order to promote high initial sales and make the good more widely known to consumers. In this case, as the market expands, the price rises.

If a new good with an initially falling price and rising sales volume—e.g., cell phones—is incorporated into the index only after a long delay, the period of falling prices will be missed and the overall price index will be biased upward. If, in contrast, the new good is incorporated into a fixed-weight index not long after its introduction, the index will reflect most of the decline that occurs early in its price cycle. Early sales are likely to be modest, and if the weights in the index remain fixed for some time, the declining prices will carry only a very small weight, and again the overall index will be biased upward, although to a smaller degree. If the new good is one whose price initially rises rapidly, the opposite results occur: whether the new good is incorporated late or early, the index will be biased downward. With either rising or falling prices, the faster the price change and the more rapid the sales growth, the larger the bias. Working on the assumption that most new goods experience a period of large price declines, the Boskin commission and other observers have attributed an upward bias to the CPI stemming principally from late introduction of many new goods.

The BLS is making changes that will reduce the magnitude of the problem: much more rapid updating of the index weighting system (every 2 years instead of every 10 years or longer) and a faster turnover of the stores from which it collects prices. But the issue of how best to deal with the introduction of new goods will remain an important problem, and handling it will require tradeoffs among competing objectives. Very early introduction of new goods raises the danger of incorporating “duds” into the index—such as Betamax VCRs or 10-inch video disks. And speeding up the rotation of retail stores (see below) into the sample is quite expensive. Chapter 5 examines and makes recommendations about the procedures and criteria that BLS should use for linking the prices of new goods into the index in a timely and nondisruptive way.

To the extent that new goods are disproportionately purchased by the affluent in the early stages of a product’s cycle, distributional consequences will arise as these goods are brought into the index. If the relative prices of new goods fall, the growth of the overall index will, on this account at least, tend to understate the inflation faced by low- and middle-income consumers.

OUTLET SUBSTITUTION

When purchasing a good at a particular store, consumers are buying not only the good itself but also a package that includes the quality of the shopping experience associated with the store—the services provided, its locational conve-



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