Adjusting VCR prices for quality change: A study using hedonic methods

Monthly Labor Review

Volumn 122, Issue 9, 1999, Pages 22-32

  Liegey, Paul R ^a   Shepler, Nicole ^a  

^a NONE

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EID: 0039626642     PISSN: 00981818     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (33)

1. The phrase, "low hanging fruit," was first used in connection with the CPI by Matthew D. Shapiro and David W. Wilcox (1997), and conveys the notion of using superlative price indexes to calculate aggregate consumer price indexes that are (virtually) free of across strata "'substitution"' bias. See Mathew D. Shapiro and David W. Wilcox, "Alternative Strategies for Aggregating Prices in the CPI," Federal Reserve Back of St. Louis Review, May/June 1997, pp. 113-25. Substitution bias is the failure to adjust for changes in consumer behavior in response to relative price changes. Brent R. Moulton and Karin E. Moses (1997) used the phrase "low hanging fruit" to suggest how the application of hedonic quality adjustment methods for the appliances including consumer electronics component of the CPI may yield significant reductions in the 'quality change' bias. Quality change bias occurs when new models of an old product appear in the market-place and have valuable improvements. See Brent R. Moulton and Karin E. Moses, "Addressing the Quality Change Isue in the Consumer Price Index," forthcoming in Brookings Papers on Economic Activity 1997, vol. 1.
2. The phrase, "low hanging fruit," was first used in connection with the CPI by Matthew D. Shapiro and David W. Wilcox (1997), and conveys the notion of using superlative price indexes to calculate aggregate consumer price indexes that are (virtually) free of across strata "'substitution"' bias. See Mathew D. Shapiro and David W. Wilcox, "Alternative Strategies for Aggregating Prices in the CPI," Federal Reserve Back of St. Louis Review, May/June 1997, pp. 113-25. Substitution bias is the failure to adjust for changes in consumer behavior in response to relative price changes. Brent R. Moulton and Karin E. Moses (1997) used the phrase "low hanging fruit" to suggest how the application of hedonic quality adjustment methods for the appliances including consumer electronics component of the CPI may yield significant reductions in the 'quality change' bias. Quality change bias occurs when new models of an old product appear in the market-place and have valuable improvements. See Brent R. Moulton and Karin E. Moses, "Addressing the Quality Change Isue in the Consumer Price Index," forthcoming in Brookings Papers on Economic Activity 1997, vol. 1.
3. U.S. Senate, Committee on Finance, "Final Report of the Advisory Commission to Study the Consumer Price Index," S. Prt. 104-72 (Washington, U.S. Government Printing Office, December 1996).
4. "Measurement Issues In The Consumer Price Index," Prepared Response for Jim Saxton, Chairman of the Joint Economic Committee (Bureau of Labor Statistics, June 1997).
5. Though VCRS were included in the CPI effective with the January 1987 revision, BLS did not begin calculating a separate index for the Video Products Other Than Televisions component of the CPI until January 1989.
6. See Robert J. Gordon, "Measurement Errors in the CPI: Causes and Consequences" Testimony before Senate Finance Committee (U.S. Congress, March 1995), pp. 1-7; and Jerry Hausman, "Cellular Telephone: New Products and the CPI" NBER Working Paper No. 5982 (Cambridge, MA, National Bureau of Economic Research, 1997).
7. See Robert J. Gordon, "Measurement Errors in the CPI: Causes and Consequences" Testimony before Senate Finance Committee (U.S. Congress, March 1995), pp. 1-7; and Jerry Hausman, "Cellular Telephone: New Products and the CPI" NBER Working Paper No. 5982 (Cambridge, MA, National Bureau of Economic Research, 1997).
8. U.S. Senate, Committee on Finance, December 1996.
9. Ibid.
10. For a recent study on VCR quality-adjusted price indexes in the United States, see Hiroshi Ohashi, "Quality-Adjusted Price Indexes for Home Video Cassette Recorders in the U.S. 1978-1987," presented at the National Bureau of Economic Research, Inc., Summer Institute 1999. A recent study by Ohashi (1999) examines quality adjusted price indexes for in the U.S. from 1978 to 1987. VCRS were introduced into the U.S. economy in the late 1970's.
11. Mathew Shapiro and David Wilcox, Shapiro, "Mismeasurement in the Consumer Price Index: An Evaluation," in Ben Bernanke and Julio Rotemberg, eds., NBER Macroeconomics Annual 1996 (Cambridge, MA, MIT Press, 1996), pp. 93-142.
12. The Consumer Electronics Manufacturers Association provides a history of VCR development since its inception. See The History and Technology of the VCR (Arlington, VA, Consumer Electronics Manufacturers Association, January 1997).
13. Ibid.
14. In particular, see page 9 of Robert J. Gordon,'s (1995) "Measurement Errors in the CPI: Causes and Consequences" (U.S. Congress, testimony presented before the Senate Finance Committee, March 1995).
15. Consumer Electronics Manufacturers Association, "Industry Origins and History" (Arlington, VA, 1997).
16. Consumers Digest, "1998 Annual Buying Guide," Consumers Digest Incorporated, December 1997, pp. 81-83.
17. For information on these other uses of hedonic results, see Paul A. Armknecht and Donald Weyback, "Adjustments for Quality Change in the U.S. Consumer Price Index," Journal of Official Statistics 5, 1989, No. 2, pp. 107-23; also see Paul R. Liegey "Apparel Price Indexes: Effects of Hedonic Adjustment," Monthly Labor Review, May 1994, pp. 38-45.
18. For information on these other uses of hedonic results, see Paul A. Armknecht and Donald Weyback, "Adjustments for Quality Change in the U.S. Consumer Price Index," Journal of Official Statistics 5, 1989, No. 2, pp. 107-23; also see Paul R. Liegey "Apparel Price Indexes: Effects of Hedonic Adjustment," Monthly Labor Review, May 1994, pp. 38-45.
19. Alan Greenspan, "Problems of Price Measurement," Remarks at the Annual Meeting of the AEA and the AFA (Chicago, IL, January 1998).
20. Effective with the January 1998 revision, the CPI for Video Products Other Than Televisions also includes satellite video products. In addition, the data collection documents used to collect specification data for each of the consumer electronic products in this item stratum have been revised and used in the CPI since April 1999.
21. Since the January 1998 revision, the CPI sample for Video Products Other Than Televisions has increased to more than 250 price quotes used each month for index calculation at the U.S. level.
22. See Armknecht and Weyback, "Adjustments for Quality Change;" Marshall B. Reinsdorf, Paul Liegey, and Kenneth Stewart, "New Ways of Handling Quality Change in the U.S. Consumer Price Index," BLS working paper no. 276 (Bureau of Labor Statistics, 1996); Moulton and Moses, "Addressing the Quality Change Issue," 1997; and Brent R. Moulton, Timothy J. La Fleur, and Karin E. Moses, "Research On Improved Quality Adjustment in the CPI: The Case of Televisions," Proceedings of the Fourth Meeting of the International Working Group on Price Indices, US. Department of Labor, sponsored by the Bureau of Labor Statistics, January 1999, pp. 77-99.
23. See Armknecht and Weyback, "Adjustments for Quality Change;" Marshall B. Reinsdorf, Paul Liegey, and Kenneth Stewart, "New Ways of Handling Quality Change in the U.S. Consumer Price Index," BLS working paper no. 276 (Bureau of Labor Statistics, 1996); Moulton and Moses, "Addressing the Quality Change Issue," 1997; and Brent R. Moulton, Timothy J. La Fleur, and Karin E. Moses, "Research On Improved Quality Adjustment in the CPI: The Case of Televisions," Proceedings of the Fourth Meeting of the International Working Group on Price Indices, US. Department of Labor, sponsored by the Bureau of Labor Statistics, January 1999, pp. 77-99.
24. See Armknecht and Weyback, "Adjustments for Quality Change;" Marshall B. Reinsdorf, Paul Liegey, and Kenneth Stewart, "New Ways of Handling Quality Change in the U.S. Consumer Price Index," BLS working paper no. 276 (Bureau of Labor Statistics, 1996); Moulton and Moses, "Addressing the Quality Change Issue," 1997; and Brent R. Moulton, Timothy J. La Fleur, and Karin E. Moses, "Research On Improved Quality Adjustment in the CPI: The Case of Televisions," Proceedings of the Fourth Meeting of the International Working Group on Price Indices, US. Department of Labor, sponsored by the Bureau of Labor Statistics, January 1999, pp. 77-99.
25. See Armknecht and Weyback, "Adjustments for Quality Change;" Marshall B. Reinsdorf, Paul Liegey, and Kenneth Stewart, "New Ways of Handling Quality Change in the U.S. Consumer Price Index," BLS working paper no. 276 (Bureau of Labor Statistics, 1996); Moulton and Moses, "Addressing the Quality Change Issue," 1997; and Brent R. Moulton, Timothy J. La Fleur, and Karin E. Moses, "Research On Improved Quality Adjustment in the CPI: The Case of Televisions," Proceedings of the Fourth Meeting of the International Working Group on Price Indices, US. Department of Labor, sponsored by the Bureau of Labor Statistics, January 1999, pp. 77-99.
26. The authors acknowledge that the use of "list" versus "transaction" prices to develop the hedonic model for this article might be affecting our index simulation results. As noted in an earlier section of this article, the data for the VCR regression model were obtained from the Consumers Digest 1998 Annual Buying Guide published in December 1997. CPI data for VCRS could not be used in this study because a 1997 cross sectional sample was insufficient for model estimation (for example, approximately 35 to 40 VCR observations). The theoretical implications of hedonic prices developed in market equilibrium are discussed in Sherwin Rosen, "Hedonic Prices and Implicit Markets," Journal of Political Economy, January-February 1974, pp. 34-55. Mary Kokoski commented to us that "since no one really pays list prices, do they (the results) really reflect the equilibrium assumptions that underlie the hedonic method?" The authors feel that the "list" prices reported in the Consumer's Digest 1998 Annual Buying Guide represent some set of transaction prices at some point in time. To the extent that these prices did not represent "true" transaction prices, we feel that the prices were "uniformly divergent" from their market values. In addition, we believe that if the 'list' prices used in this article to develop the hedonic model, were "uniformly divergent" from their market or transaction values that the relative magnitudes and directions of the parameter estimates calculated above approximate some market equilibrium. Market equilibrium is empirically difficult to determine for those goods and services that experience rapid (price and quality) change. We would like to emphasize that there is no consideration by BLS to use the model developed in this article to adjust the official index for this category of items. As noted in appendix 2, BLS will collect, in addition to what is used for index calculations, "transaction" price and specification data in fiscal year 1999 to develop hedonic models for a number of consumer electronic goods including VCRS.
27. The authors acknowledge that the use of "list" versus "transaction" prices to develop the hedonic model for this article might be affecting our index simulation results. As noted in an earlier section of this article, the data for the VCR regression model were obtained from the Consumers Digest 1998 Annual Buying Guide published in December 1997. CPI data for VCRS could not be used in this study because a 1997 cross sectional sample was insufficient for model estimation (for example, approximately 35 to 40 VCR observations). The theoretical implications of hedonic prices developed in market equilibrium are discussed in Sherwin Rosen, "Hedonic Prices and Implicit Markets," Journal of Political Economy, January-February 1974, pp. 34-55. Mary Kokoski commented to us that "since no one really pays list prices, do they (the results) really reflect the equilibrium assumptions that underlie the hedonic method?" The authors feel that the "list" prices reported in the Consumer's Digest 1998 Annual Buying Guide represent some set of transaction prices at some point in time. To the extent that these prices did not represent "true" transaction prices, we feel that the prices were "uniformly divergent" from their market values. In addition, we believe that if the 'list' prices used in this article to develop the hedonic model, were "uniformly divergent" from their market or transaction values that the relative magnitudes and directions of the parameter estimates calculated above approximate some market equilibrium. Market equilibrium is empirically difficult to determine for those goods and services that experience rapid (price and quality) change. We would like to emphasize that there is no consideration by BLS to use the model developed in this article to adjust the official index for this category of items. As noted in appendix 2, BLS will collect, in addition to what is used for index calculations, "transaction" price and specification data in fiscal year 1999 to develop hedonic models for a number of consumer electronic goods including VCRS.
28. Moulton and others, "Research On Improved Quality Adjustment in the CPI," 1999.
29. The difficulties with including CPI data are exposed in Moulton, and others, "Research On Improved Quality Adjustment in the CPI," 1999.
30. A copy of this CPI document is available upon request from the authors: Paul R. Liegey and Nicole Shepler, Bureau of Labor Statistics, 2 Massachusetts Ave., NE., Rm. 3260, Washington, DC 20212 or by e-mail: liegey_p@bls.gov or Shepler.,N@bls.gov.
31. Katharine G. Abraham, John S. Greenlees, and Brent R. Moulton, "Working to Improve the Consumer Price Index," Journal of Economic Perspectives, Winter 1998, pp. 27-36.
32. Ibid.
33. Upon request, researchers may obtain a list of many of these products that are priced in the Appliances, Including Consumer Electronics component of the CPI along with their calendar year 1998 sample and substitution counts. These sample counts reflect price quote allocation based on the 1998 CPI revision, using expenditure patterns for calendar years 1993-95. By e-mail contact liegey_p@bls.gov or send request to Paul R. Liegey, Bureau of Labor Statistics, Rm. 3260, 2 Massachusetts Ave., NE, Washinton, DC 20212.