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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
adjustments to appliances and electronics has not had a large impact on those item subindexes. Our conservative view on integrating hedonics techniques has more to do with concern for the perceived credibility of the current models. While there is an established academic literature on estimating hedonic functions, researchers are much less experienced using them across a wide variety of goods in price index construction. Thus, while members of the panel agree that BLS and others should vigorously continue to research the viability of hedonics, the methods may, in their current state of development, only be justifiably applied to a narrow class of goods.
So long as hedonic techniques are restricted to replacements for items that have disappeared from store shelves, as is now predominantly the case, their use will not have a significant impact on index growth. Only if extended on a broader basis (e.g., to items coming into the index through the rotation of the retail store sample) will the use of those techniques make much difference. Such an extension would be unwarranted until the recommended research, development, and testing program makes progress on the measurement issues we have identified. To assist in this task, we recommend the following:
An independent advisory panel, consisting of econometricians, statisticians, index experts, marketing specialists, and possibly product engineers should be formed to provide guidance on both conceptual and application issues pertaining to hedonic methods. (Recommendation 4-8)
BLS, working with the recommended advisory panel, should assess the impact of modeling imperfections on the validity of their hedonic adjustments prior to their introduction into the index. This would provide an analytic basis for proceeding sensibly in the face of external pressures to proceed quickly in this area. The advisory panel should also provide outside review to help guide decisions about potential new applications and about which BLS pilot studies are adequately developed to be incorporated into the index. Together, our recommendations emphasize the high priority that the hedonics research program should receive.
Another class of product changes involves the appearance of goods with genuinely new characteristics (such as mobility for phones). These goods are sufficiently unlike existing ones in that they do not enter the CPI as part of the item replacement procedure or even when the sample of retail outlets is rotated. Hedonic techniques do not hold much promise for measuring the effect on the index of the introduction of such goods.
If a new good displays new characteristics, it is likely to become eligible for inclusion in the market basket only when item strata are redefined and upper-