nience (or inconvenience), the variety of products available, its return policy, and so forth.

The BLS gradually rotates the sample of retail outlets from which it collects prices, and over time the new samples capture the changing mix of outlets patronized by the buying public. Under current BLS procedures, when new stores enter the sample, all of the difference between an item’s price at the old outlet and its price at the new outlet is implicitly assumed to reflect differences in the “quality” of the shopping experience; none of it shows up as a pure price change. This practice can produce a bias if price variation across outlets allows consumers, by altering their shopping behavior, to reduce their consumption costs, adjusted for the quality of the shopping experience, in a way not detected by the CPI.

The clearest evidence that consumers are reducing costs is indicated by the increase, for a number of years now, in the market share of high-volume, low-price retail outlets. The prices paid at these outlets are often substantially lower than those in conventional stores. Under current assumptions, lower prices are being fully offset by a lower quality shopping experience—as represented by “goods,” such as convenience or a store’s return and exchange policy, that are omitted from the CPI. The fact that the market share of the low-price discounters has been steadily growing, however, implies that even after “quality adjustment” the prices at those stores are lower than elsewhere. As new outlets open, consumers in the area gradually change their shopping behavior and take advantage of the lower quality-adjusted prices. At the same time, a minority of consumers who would have preferred to continue shopping at traditional stores find them to be driven out of business by the new outlets, and those consumers suffer an increase in their cost of living.

From the standpoint of a cost-of-living index, the current procedure for handling sample rotation among outlets misses some of the decline in living costs associated with this ongoing shift in consumer purchasing patterns. The few empirical studies that have been done, however, suggest the resulting effect on the overall CPI is relatively small. Identifying and quantifying “quality” differences in the shopping experience offered by different types of outlets, in order to make a proper adjustment for what is happening, poses measurement difficulties for which satisfactory answers are not currently available. In Chapter 5 the panel makes recommendations to the BLS about what to do in the current absence of methods for making outlet-quality adjustments and suggests what priority it should give to research and development efforts in this area.

STOCKS AND FLOWS

Many longer-lived goods, such as owner-occupied housing, automobiles, and appliances are durable capital goods that gradually yield a flow of consumer services over a period of years. Even some “nondurable” goods (e.g., men’s suits) often provide services for some years. While there is no consensus among experts



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