level weights reestimated. To the extent that new goods offer previously unavailable benefits to early purchasers and because they typically experience price reductions early on, some declines in the cost of living are missed during the period before the new goods are incorporated into the index. Prominent examples of this phenomenon occurred when mobile phones and VCRs were introduced into the index many years after their appearance on the market.
Some proponents of the COLI approach argue that econometric methods should be used to estimate the “virtual” price reduction that occurs when a new product appears. Those estimates, in turn, could be incorporated into the index. However, the panel had serious doubts about the effectiveness of econometric techniques in this regard, and some members dispute the conceptual validity of treating the benefits from introducing new products as a price decrease:
Virtual price reductions associated with the introduction of new goods should not be imputed for use in the CPI. (Conclusion 5-1)
Members of the panel recognize that, outside of price measurement, there is nowhere in the national accounts for the effect of new products to be included, and real growth in the economy may therefore be understated. Rather than modifying the CPI, the panel suggests that research in this area be directed toward developing a separate experimental COLI that is adjusted, to the extent possible, to account for changes as new products and technologies diffuse throughout the economy.
Additionally, because, once introduced, new goods frequently display very different price trends from established ones, the panel does endorse BLS’s recent efforts to update weights every 2 years, to streamline sample rotation, and to perform targeted product introductions, all of which should enhance the probability that new products will enter the CPI basket more quickly than has historically been the case.
Another potential bias of the CPI, when used as a COLI (or possibly even as a COGI), arises because different stores sell identical items at different prices. If price variation is not proportional to differences in the quality of the retail service offered (as the ongoing trend to lower-price, lower-service outlets might suggest), consumers can lower their living costs by altering their shopping behavior. These types of “price reductions” are not fully captured by the CPI. Currently the underlying conceptual apparatus of the CPI assumes that when lower-price outlets enter the sample, there is no net price reduction, because all of the price difference between the old and the new outlet reflects a difference in the quality of service.
Because current techniques cannot consistently and accurately separate quality changes from the price effects associated with the value of retail service, BLS