sou · GNB3124 · 2000-01-01 00:00:00 — 2.In a sample of outlets all varieties of this item are selected.2 These are kept in the sample throughout their lifetime (as long as they are sold in significant quantities). 3.Resampling is done every month so that the sample always covers all items sold that month. 4.Price change is computed from one month to next as an average over those items that are in the sample in both months. Price change is thus estimated from matched samples. 5.Price change from up to the last month is computed by multiplying the month-to-month links, i.e., by monthly chaining. This method guarantees overlaps every month unless all items disappear at the same time in the outlet which is not usually the case. We believe that the MCR method is very promising for many product areas. It is easy to use, it guarantees a continued update of the sample with new varieties for representativity and it has small biases for all product groups, where obsolescense is negligible. It could first be introduced for household appliances and home electronics. Research in this area is clearly also needed. A comparison between an MCR index and one based on hedonic regression would be particularly interesting. 2 Actually it is not necessary to take all varieties. The point is that there must be resampling every month so that the sample is always representative of the current product mix. Recommendations by product group Bilaga 6 presented a bias assessment by product group. We give an English version of it as Table 1 below. Table 1: Estimated KPI biases due to quality change and new products (housing excluded) Contribution to total bias at home and outdoors Radio/TV, furniture, household New and used cars Against this background we discuss some specific measures in these product groups that are designed to reduce this bias. Food, at home and out of home The food bias arises from longterm changes in the food at home, fast food and restaurant markets. Greater variety and convenience and easier access to fresh food all year around were major factors for quality improvements in the past. The bias is very much a new good and outlet phenomenon and is thus very difficult to reduce by usual methods for quality change. The ideal method – estimating a reservation price for the new good is not operational. At present no explicit quality adjustments are done in the KPI for these products. Overlap pricing is used in . Other replacements are rare and deletion of non-matching items is used for food in supermarkets. A new trend in the fast food market – fast food in community stores (närbutiker) – which is already present in the is likely to need more attention in the near future. However, it is difficult to suggest a method that will adjust for the consumer surplus generated by this change. The deletion method, when applied after the reference period, should be replaced by an imputation method so that earlier price changes for that item are not excluded. This is a relatively minor point, however. Household appliances include refrigerators, freezers, washing , dishwashers, stoves, microwave ovens, toasters etc. For these commodities price collectors make the quality adjustments themselves. No assessment of their work has been done in this area. We recommend a move from the present method to a more objective one. This area is particularly promising for the application of the MCR method discussed above. Hedonic regression would also be possible to use, although probably too costly. For evaluation purposes it would be very valuable to make a one-off comparative study between the MCR and the hedonic method for at least one product category. Radio/TV, furniture, household equipment and telephone This category includes a wide range of goods and services with disparate problems. At present price collector adjustment is used for most goods categories whereas no adjustment is done for TV and telephone services. For radio/TV, stereo, video, cameras etc., the situation is similar to that of the appliances category above, although quality improvement is likely to be faster in this area, since new models are introduced more frequently. The MCR method is the most promising method here also. For furniture and household equipment price collector adjustment is probably without major problems, although Boskin considered there to be a certain bias also for this category. Some combination of the simple methods discussed above would probably be sufficient for these categories. In the long run MCR would be an option here too. TV and telephone services present much greater difficulties. The changes going on in the markets are now extremely rapid and will continue to be so for the foreseeable future. New kind of both goods and services will emerge. There seems to be no alternative here other than central judgemental adjustments on a case by case basis. One first action here is to telephone, TV, cable-TV and Internet services in the same subindex, and include the products associated with these services into them same group. (One problem with this is that the Coicop classification system, used in the HICP, separates these categories.) The inclusion of more and more TV-channels in one subscription should be considered as improvements as should 24-hour news channels, Internet access from the TV set, TV access from the computer etc. The present method is hedonic adjustment plus sales effect adjustment for clothing and price collector adjustment plus sales effect adjustment for shoes. The method for clothing is very advanced and improvements are hard to suggest. For shoes a move to hedonic regression would be an improvement, although not with a high priority, since the bias with the present method is not believed to be large. A question is whether the gains achieved by the hedonic method are large enough to motivate its higher cost in the long run. (1998) demonstrates that the net adjustments for quality change for clothing is close to zero, which implies that roughly the same result would be obtained by direct price comparison as are obtained by the hedonic method. The hedonic method is, however, more robust against changes in the product mix than the simple methods would be. The MCR is not generally suitable in this area due to large obsolescence effects. New and used cars The bias today is due to the conservative expert valuation of improvements in new models. It seems that a new method is warranted. Two possibilities stand out here – option pricing and MCR. (For reasons given above, the hedonic method is unsuitable.) In option pricing extra characteristics such as airbags, car stereo systems etc. included in this years model but not in last years are valued at their price when they were earlier possible to pay for separately. This option price (tillvalspris) is then added to the reference price of the car before calculating the price relative. Sometimes a certain fraction (50 or ) of that price is taken, based on an argument that only some of the consumers were prepared to pay that There are two reasons why it is preferable to take the full price, however. First, although some consumers were not prepared to pay the full optional price some would have been willing to pay more (consumer surplus). Second, not all changes are visible and by taking we may make some allowance for hidden improvements. Also for used cars there are improvements which are not acknowledged in todays method. Option pricing would be a possibility here too, although the practical problems would be greater, since model changes would have to be kept track of for many years and some kind of proportional mark-down of the option price value would have to be made. The MCR method would need some modification in order to apply well to new cars. Instead of selecting all items in an outlet, some kind of monthly update of the sample with new brands and models would be needed. Register produces very timely information on new registrations, which could be used at least for the second month after the introduction of a new model. A monthly resample, rather than a complete coverage of new models, would then be the natural choice. If there are no obsolescence effects and price equilibrium holds (i.e., prices adjust immediately to reflect quality differentials), such a method would be unbiased. These criteria need more careful examination before the MCR method can be recommended for cars. Public and other transport This area is dominated by various public transport facilities like bus, railway, taxi, metro, , boat but also packaged tours (air charter). At present, no quality adjustments are done for these categories. The zero bias estimate in Table 1 is an informed guess of a balance between both improvements and deteriorations. Better informed quality adjustments are desirable, since the real biases could be upwards as well as downwards. They would, however, have to take the form of explicit central adjustments on a case by case basis using specially collected quality data on timeliness, frequency of services, convenience, safety, accident rates etc. This could be done as a once-a-year quality adjustment, e.g. for the long-term index. It would still require a certain increase of effort and cost. This is a category with a large bias. The bias is due to improved, medicines and dental treatments. In practice hospital treatments are not included in the KPI. The private fees are minimal and could be seen as payment for lodging and food only. Since the actual treatments are almost completely covered by goverment, it is logical (according to the conditional cost of living principle) to regard quality changes as not being applicable to the KPI but to a (non-existent) price index for public consumption. We propose that the same principle be applied to doctors and nurses fees for acute consultations. This means that quality adjustments should not be made for these service. Pharmaceuticals are to a greater extent paid by the consumers themselves, although subsidies are large. Today this subindex is computed by the Government Pharmacy (Apoteksbolaget) and no quality adjustments are done. Explicit quality adjustments would be very difficult in this area but one improvement would be somewhat easier: To compare new, generical medicines with their patented predecessors (which are based on the same substances) instead of linking them in without comparison backwards. This would at least to some extent reduce the overestimating bias caused by successive improvements in medicines. This method is presently used by the U.S. The largest part of dental services is today paid out of the patients pockets. Quality adjustments will have to be treated on a case basis as for other services and refer to the sample of treatments. New technology leading to more reliable fixings, less pain etc. should be taken into account. To this category commodities like newspapers, books, sporting equipment and toys belong. There are also services like admissions to cinemas, video rentals, theatres, sporting events, concerts and own sport activity fees (gyms etc.). For toys and sporting equipment, price collectors make quality adjustments but else any quality adjustments are done today. This bias estimate, which is is due to the rapid expansion of sport equipment and electronic toys and games, is also taken from the Boskin commission who for some reason did not assign any bias contribution from the services part. The bias is almost attributable to the introduction of new products, for which the difficulties of accounting for the quality changes are insurmountable. In some cases, however, quality adjustments could and should be done, to a greater extent than today. An example is a newspaper, where supplements with more reading, TV guides etc. are added. We have pointed at a number of potential improvements in quality adjustment methods in the new KPI. The single most promising improvement would be the use of the MCR method which would not require significant resource increases, although fewer outlets per product would likely be necessary to balance the increase in varieties per outlet. We recommend its use whereever obsolescense effects are small and first and foremost for durables and high-tech products. It seems advisable to proceed stepwise and to start with only a few products in a first wave in order to experience and further evaluate the method. Hedonic regression, the main competitor to the MCR would be much more resource demanding and cannot possibly be used on a large scale. Reasearch as to the consistency of hedonic regression and the MCR in some key product areas would be valuable. For new cars an alternative (or complement) to MCR is option pricing, where we recommend taking of the price of the earlier optional extra for adjusting the reference price. It does not solve the matching problem, however, of how to compare new brands with old ones. The MCR would provide a remedy for this in case the obsolescence effects are judged to be small. The role of judgemental adjustments ought to decrease successively and replaced by more objective methods whose properties are easier to assess. For some services, however, there is generally no alternative to direct adjustment on a case by case basis. Avoiding adjustment, as today, is bound to lead to an overestimating bias in the long run. TV, telephone and Internet services are particularly important to focus on in the next few years since important changes will take place here. A strategy for quality adjusting public transport services also needs to be worked out. These adjustments are relatively few in number and need to be done once a year, be preceded by special investigations and finally decided by . CSO (1993): Some problems in the application of hedonic regression. Paper to the joint ECE/meeting on consumer price . CES/AC. 49/35. , 25–28 October, 1993. (1992): Operationalising a hedonic Index in an Official Price Index Program – Personal Computers in the Price Index. Statistics , R&D Report 1992:15. , R.J. (1990): The Measurement of durable goods prices. Kokoski, M. (1993): Quality adjustment of price indexes. , , pp. 34–46. Moulton, B.M. and , K.E. (1997): Addressing the quality change issue in the consumer price index. Brookings Papers on Economic Activity, 1, 305–349. (1998): Quality adjustment of clothing in the Swedish consumer price index. Paper presented at Methodological Issues in Official Statistics, 12–13 October, . , J. and Catron, B. (1990): An experimental price index for the computer industry.