Services Producer Price Indices: 

Past, Present, and Future 

Draft Paper 

May 26, 2006 

Authors 

Roslyn Swick 

Deanna Bathgate 

Michael Horrigan 

U.S. Bureau of Labor Statistics 

2 Massachusetts Avenue NE 

Washington DC 20212

This paper has been prepared for presentation to the Federal Economic Statistics Advisory Committee 

(FESAC) on June 9, 2006. It represents work in progress and does not represent any agency's final 

positions on issues addressed. The FESAC is a Federal Advisory Committee sponsored jointly by the 

Bureau of Labor Statistics of the U.S. Department of Labor and by the Bureau of Economic Analysis and 

the Bureau of the Census of the U.S. Department of Commerce. 
Table of Contents 

1 Introduction ..................................................................................................................... 1 

 1.1 Defining PPI Services ................................................................................................ 1 

 1.2 PPI Services Historical Perspective ........................................................................... 1 

 1.3 General PPI Principles and Guidelines for Services Expansion................................. 3 

2 General Methodology for Developing New Service Industry Indices.................. 4

 2.1 Research Phase......................................................................................................... 4 

 2.2 Frame/Sample Research and Development............................................................... 6 

 2.3 Development of Collection Materials.......................................................................... 7 

 2.4 Review of Data/Publication......................................................................................... 7 

 2.5 Keeping the Service Indices Up to Date..................................................................... 8 

3 Industry/Sector Methodologies and Challenges..................................................... 10

 3.1 Finance and Insurance............................................................................................. 10

 3.1.1 Banking.................................................................................................................... 10 

 3.1.1.1 Output Measurement............................................................................................ 10 

 3.1.1.2 Service/Pricing Characteristics............................................................................. 12 

 3.1.1.3 Sample Unit Identification and Frame and Sampling Issues................................ 12 

 3.1.2 Insurance................................................................................................................. 14 

 3.1.2.1 Output Measurement............................................................................................ 14 

 3.1.2.2 Service/Pricing Characteristics............................................................................. 17 

 3.1.2.3 Sample Unit Identification and Frame and Sampling Issues................................ 20 

 3.2 Real Estate and Rental............................................................................................. 20

 3.2.1 Lessors of Nonresidential Buildings......................................................................... 20 

 3.2.1.1 Output Measurement............................................................................................ 20 

 3.2.1.2 Service/Pricing Characteristics............................................................................. 24 

 3.2.1.3 Sample Unit Identification and Frame and Sampling Issues................................ 25 

 3.2.2 Offices of Real Estate Agents and Brokers............................................................. 26 

 3.2.2.1 Output Measurement............................................................................................ 26 

 3.2.2.2 Service/Pricing Characteristics............................................................................. 26 

 3.2.2.3 Sample Unit Identification and Frame and Sampling Issues................................ 27 

 3.2.3 Passenger Car Rental............................................................................................. 28 

 3.2.3.1 Output Measurement............................................................................................ 28 

 3.2.3.2 Service/Pricing Characteristics............................................................................. 28 

 3.2.3.3 Sample Unit Identification and Frame and Sampling Issues................................ 28 

 3.3 Health Services......................................................................................................... 29 

 3.3.1 Hospitals.................................................................................................................. 29 

 3.3.1.1 Output Measurement............................................................................................ 29 

 3.3.1.2 Service/Pricing Characteristics............................................................................. 30 

 3.3.1.3 Sample Unit Identification and Frame and Sampling Issues................................ 31 

 3.3.2 Nursing Care Facilities............................................................................................ 31 

 3.3.2.1 Output Measurement............................................................................................ 31 

 3.3.2.2 Service/Pricing Characteristics............................................................................. 32 

 3.3.2.3 Sample Unit Identification and Frame and Sampling Issues................................ 33 

ii
 3.3.3 Offices of Physicians............................................................................................... 33

 3.3.3.1 Output Measurement............................................................................................ 33 

 3.3.3.2 Service/Pricing Characteristics............................................................................. 35 

 3.3.3.3 Sample Unit Identification and Frame and Sampling Issues................................ 36 

 3.4 Retail and Wholesale Trade..................................................................................... 36

 3.4.1 Retail Trade............................................................................................................. 36 

 3.4.1.1 Output Measurement............................................................................................ 36 

 3.4.1.2 Service/Pricing Characteristics............................................................................. 38 

 3.4.1.3 Sample Unit Identification and Frame and Sampling Issues................................ 39 

 3.4.2 Wholesale Trade..................................................................................................... 39

 3.4.2.1 Output Measurement............................................................................................ 39 

 3.4.2.2 Service/Pricing Characteristics............................................................................. 41 

 3.4.2.3 Sample Unit Identification and Frame and Sampling Issues................................ 42 

 3.5 Information and Communication............................................................................ 42

 3.5.1 Newspaper and Periodical Publishing..................................................................... 42 

 3.5.1.1 Output Measurement............................................................................................ 42 

 3.5.1.2 Service/Pricing Characteristics............................................................................. 43 

 3.5.1.3 Sample Unit Identification and Frame and Sampling Issues................................ 44 

 3.5.2 Software Publishing................................................................................................. 45

 3.5.2.1 Output Measurement............................................................................................ 45 

 3.5.2.2 Service/Pricing Characteristics............................................................................. 47 

 3.5.2.3 Sample Unit Identification and Frame and Sampling Issues................................ 49 

 3.5.3 Television Broadcasting.......................................................................................... 49 

 3.5.3.1 Output Measurement............................................................................................ 49 

 3.5.3.2 Service/Pricing Characteristics............................................................................. 50 

 3.5.3.3 Sample Unit Identification and Frame and Sampling Issues................................ 51 

 3.5.4 Cellular and Other Wireless Telecommunications................................................... 51 

 3.5.4.1 Output Measurement............................................................................................ 51 

 3.5.4.2 Service/Pricing Characteristics............................................................................. 52 

 3.5.4.3 Sample Unit Identification and Frame and Sampling Issues................................ 53 

 3.5.5 ISPs and Web Search Portals................................................................................. 54 

 3.5.5.1 Output Measurement............................................................................................ 54 

 3.5.5.2 Service/Pricing Characteristics............................................................................. 55 

 3.5.5.3 Sample Unit Identification and Frame and Sampling Issues................................ 56 

 3.6 Professional Services.............................................................................................. 57

 3.6.1 Output Measurement............................................................................................... 57 

 3.6.2 Service/Pricing Characteristics................................................................................ 58 

 3.6.3 Sample Unit Identification and Frame and Sampling Issues................................... 59 

 3.7 Administrative Services........................................................................................... 59 

 3.7.1 Temporary Help Services........................................................................................ 59 

 3.7.1.1 Output Measurement............................................................................................ 59 

 3.7.1.2 Service/Pricing Characteristics............................................................................. 59 

 3.7.1.3 Sample Unit Identification and Frame and Sampling Issues................................ 60 

 3.7.2 Employment Agencies............................................................................................. 60 

 3.7.2.1 Output Measurement............................................................................................ 60 

 3.7.2.2 Service/Pricing Characteristics............................................................................. 60 

 3.7.2.3 Sample Unit Identification and Frame and Sampling Issues................................ 61 

 3.7.3. Janitorial Services................................................................................................... 61 

iii
 3.7.3.1 Output Measurement............................................................................................ 61 

 3.7.3.2 Service/Pricing Characteristics............................................................................. 61 

 3.7.3.3 Sample Unit Identification and Frame and Sampling Issues................................ 62 

 3.8 Transportation.......................................................................................................... 63

 3.8.1 Passenger Air Transportation.................................................................................. 63 

 3.8.1.1 Output Measurement............................................................................................ 63 

 3.8.1.2 Service/Pricing Characteristics............................................................................. 63 

 3.8.1.3 Sample Unit Identification and Frame and Sampling Issues................................ 64 

4 Where Does the PPI Go from Here?........................................................................... 64 

 4.1 What Aggregation Strategies Should Be Considered to Include Services?............... 64 

 4.1.1 Industry and Commodity Strategies......................................................................... 64 

 4.1.2 Special Aggregate Indices....................................................................................... 65 

 4.1.3 Future Developments.............................................................................................. 66 

 4.2 What are the Gaps?.................................................................................................... 66 

 4.3 What Principles Should Be Used to Determine where PPI Should Be 

 Expanded?............................................................................................................... 73 

 4.4 Concluding Remarks................................................................................................... 79 

Addendum A - Data Analysis..................................................................................... 80 

Addendum B - .SPPI Thesaurus.......................................................................................100 

Addendum C - PPI Quality Assessment Procedures..............................................108

References.............................................................................................................................113 

iv
1 Introduction 

Since its publication of its first service sector industry in 1985, Railroad Line Haul Operations, 

the Producer Price Index (PPI) Program of the Bureau of Labor Statistics has introduced 135 

service industry price indexes, with plans to introduce 6 more over the next two years. This 

ambitious and complex undertaking has helped close a significant gap in U.S. national statistics 

by publishing price indexes in industries that represent over 77 percent of in-scope service 

sector output. One principal purpose of this paper is to document the history of this important 

expansion. A second principal objective is to identify the gaps that remain both in service sector 

and overall industry coverage, and to suggest strategic approaches, both quantitative and 

qualitative, for prioritizing the closing of these gaps in the future. 

There are four sections to this paper. In the first section, the general guidelines and principles 

for developing any price index, including service industry ones, are laid out along with a timeline 

of the significant publication and funding milestones reached in the expansion of service sector 

coverage in the PPI program. The second section of the paper provides a more detailed 

discussion of the steps that are taken by BLS to develop a price index for any service industry, 

from initial research on how to define output and the identification of price determining 

characteristics to sampling, data collection and on through to final publication. The third section 

of the paper discusses the methodological approaches and challenges to developing and 

maintaining high quality price indices for a select group of service providing industries. The 

industries selected provide a spectrum of the major pricing methodologies that were used in the 

overall service sector expansion. The fourth and final section of the paper explores future 

directions for the PPI Program. Two separate themes are explored. The first is to examine the 

potential that the service sector expansion has for creating new aggregation price indices that 

may include both the service providing and goods producing sectors. The second explores the 

remaining gaps in PPI coverage for the service-providing sectors and in the good-producing 

sectors. In particular, this section discusses and requests input on the criteria that are being 

developed to help determine the priorities in closing the gaps and where the emphasis should 

be for future PPI expansion efforts. 

1.1 Defining PPI Services 

The mission of the Producer Price Index (PPI) program is to measure the average 

change in output prices received by domestic producers of goods and services. The PPI 

universe consists of the output from all industries that provide US domestic, marketed 

goods and services. Excluded from the PPI universe are output generating activities 

with no observable prices. In the services sectors, examples of such excluded service 

industries are Social Assistance and Funds and Trusts. 

Although the PPI universe includes all marketed domestic services, some services 

subsectors have been excluded from the US PPI service sector development. These 

subsectors include, for example, Personal and Laundry Services and Food Services and 

Drinking Places, which are already included and more closely aligned with the 

measurement objectives of the Consumer Price Index Program. 

 

1.2 PPI Services Historical Perspective 

Research into the development of the service sector PPI began in the mid 1980s, following 

the expansion of mining and manufacturing price indexes to include both industry and 

 1 
commodity indices. As noted above, the first service sector industry index, Railroad, Line 

Haul Operations, was published in January 1985. In the late 1980s, several service 

industries in the transportation sector were developed and published. Although the 

publication of these industries represented a major developmental milestone in terms of 

publishing service industry PPIs, the pricing methodologies for these initial industries were 

very straightforward, with significant similarities to manufacturing sector industries. 

While continuing to achieve success in the development and publication of the 

transportation sector industries into the early 1990s, the PPI program also undertook 

research on more complex service industries, such as hospitals, physicians, employment 

agencies, and telephone communication. This work was aided by the receipt of additional 

funding over 1990 to 1994 from the Initiative to Improve the Quality of Economic Statistics, 

or the so-called Boskin Initiative. These industries required development of new, 

revolutionary pricing concepts and methodologies. Success in these complex service 

industry developments was first achieved in January 1993 with the publication of the 

producer price indices for the three hospital industries, General Medical and Surgical 

Hospitals, Psychiatric and Substance Abuse Hospitals and Other Specialty Hospitals. The 

PPI service industry indices for Offices of Physicians and Employment Agencies followed 

with publication in 1994. 

By the mid 1990s, PPI was regularly developing and publishing new indices for services 

industries. Some of the notable industries developed during this time include a variety of 

Professional services, such as Lawyers, Architects, and Accountants, Real Estate 

services, Prepackaged Software, and Property and Casualty and Life Insurance. In 2000, 

the PPI program achieved another significant milestone with the publication of the first 

Retail Trade industry indices, for Grocery Stores. Developing services price indices to 

measure the output for retail trade industries presented many new challenges. In 2001, 

after a long period of research and development, PPI service industry indices were 

published for Security Brokers and Dealers. 

By 2001, the PPI program had introduced price indices for industries that represented 50% 

coverage of the in-scope services sectors as measured by 1992 GDP. In FY 2001, PPI 

received additional resources to continue the ongoing expansion of the PPI coverage of 

the services sectors. 

Funding received in FY 2001 permitted continued expansion of service sector coverage 

and maintenance of indices already developed and in publication. In early 2000, in 

anticipation of the additional resources for services expansion in the PPI, research began 

on producing services price indices for the banking industries, the wholesale trade sector, 

and additional information technology industries. In 2005, another major milestone was 

achieved when industry indices for the banking industries and the wholesale trade sector 

were published. Also published in 2005 were indices for Internet Service Providers and 

Web Search Portals. 

To date, the US PPI Program’s publication of Service-Providing Producer Price Indices 

(SPPI) includes 100 service industry indices and 124 wholesale and retail trade indices 

within the Service-Providing Sector as defined by the 2002 North American Industrial 

Classification System (NAICS). Currently, the SPPI covers approximately 76% of in-scope 

service industries based on 1992 GDP. 

 2 
1.3 General PPI Principles and Guidelines for Services Expansion 

The U.S. PPI services expansion followed the same basic principles found in the mining 

and manufacturing PPIs. The same Laspeyres pricing formula was used with the same 

goal of monthly pricing for services. The same methods were used to collect the initial 

data and the continuous monthly data updates. Initial prices along with detailed price 

determining characteristics of sampled services are collected by field economists 

conducting in-person visits with the appropriate company officials. These in-person visits 

allow for detailed sampling methodologies to be employed to select the services to price 

over time. The selected services are repriced monthly by mail or fax. 

As with traditional manufacturing PPI pricing, service PPIs measure the net return to the 

service establishment for providing a specified service to a specified buyer under specified 

transaction terms for a specified time. 

The lessons learned from producing manufacturing PPIs provided substantial insight into 

the pricing of service industries. A complete service that can be priced over time has to be 

selected. A detailed description of the selected service is required in order to accurately 

price that service over time. The complete service should be priced at the time the service 

is provided and not when the service was contracted or ordered. “Future” prices are never 

included in the PPI. Lagged prices are also generally not acceptable in the PPI. If there 

are no transactions of the exact service provided during the pricing period and that service 

is still offered, then, as in manufacturing, the price for the service may be estimated based 

on current transactions for similar services. In order for the company respondent to 

provide an accurate estimate of the price, there will have to have been transactions that 

were similar enough to the selected service that the company respondent has sufficient 

information to calculate a current price. As in manufacturing PPIs, when the price for the 

service cannot be accurately measured by a single transaction price, average price or unit 

value prices are sometimes employed. The average prices are for a homogeneous group 

of service transactions for which the average price incorporates various competitive pricing 

and discounts and therefore, providing a more accurate price measure. 

Also as in manufacturing PPIs, when a service item that is being priced is discontinued and 

a replacement service is selected, quality adjusting the difference between the two 

services is preferred, using the difference in provider or resource costs for the quality 

adjustment. There are some service industries where hedonic modeling regression may 

be used to determine the value of quality change between the services. This hedonic 

quality adjustment method is also used in several manufacturing PPIs such as computers 

and printers. However, in general, explicit quality adjustment has not been possible for 

most service industries and, as a consequence, the difference in price between a 

discontinued service and its replacement must be ignored in producing the index. The PPI 

program is continually researching to find alternative quality adjustment methods to use in 

service industries. 

There are also some aspects to producing service PPIs that are completely different from 

manufacturing PPIs. In manufacturing, by following the same product over time constant 

quality is achieved. In some service industries, however, adjustments or updates have to 

be made to the service items over time in order to maintain the continuous pricing of the 

same constant quality of service. In some cases, the company respondents are able to 

update the service descriptions to keep the quality constant. In other cases, the data has 

to be adjusted using secondary sources in order to measure the same service over time. 

 3 
An example of these adjustments can be found in the homeowners’ property and casualty 

indices. An actual policy for a specific home and homeowner is selected to price over time. 

The level of risk in the policy is held constant by updating the value of the home being 

insured. The Marshall & Swift/Boeckh Building Cost Index is used to make adjustments for 

the value of the home. This index is used by the insurance companies and relates to the 

construction costs of homes. Additional specific examples of these adjustments or 

updates are found in Section 3. The adjustments or updates vary considerably by service 

industry. 

Finally, the identification of the establishment or profit maximizing center (PMC) is 

sometimes much more difficult for service industries than manufacturing industries. The 

PMC is the unit of a company within which prices are formed, products are marketed, and 

records are kept. In some industries, the business models used by national service 

companies have made identification of the PMC very challenging. In other industries, the 

state regulations or other government regulatory agencies have dictated the corporate or 

business structure for the service companies. 

2 General Methodology for Developing New Service Industry Indices 

Over the course of the past 20 years, a general methodology for researching and publishing 

new industry price indices, including those for service industries, has been developed. This 

model has been refined and updated over this time period. There are also some aspects of the 

development model or plan that are customized depending on the various characteristics of the 

industry, the current state of the economy, current level PPI resources, and a variety of other 

characteristics. 

2.1 Research Phase 

The first phase in the development process for developing a new PPI is the research phase. 

The goals of the research phase are to identify and define the output of the industry, develop a 

pricing methodology that accurately measures that output, identify the various service 

characteristics (both price-determining and non-price-determining) of the output, and develop a 

methodology that allows the service industry index to maintain constant quality over time. 

A certain amount of library or reference research is required initially to enable the researcher to 

become familiar with the industry. Once the researcher is familiar enough with the industry that 

issues and strategies can be outlined, contacts with trade associations and other industry 

representatives can be made. It is critically important to get input from industry members 

themselves. One of the reasons for contacting members of the industry is to see how they view 

themselves and their activities. An additional important reason for contacting industry members 

is to find out how the industry is structured, how record keeping is done in the industry, and how 

actual services are provided by that industry. 

Depending on the results of the initial reference research, a plan is proposed for industry 

research that includes the contacts with industry members. For all interviews, a paper on goals 

and questions is developed and vetted internally, prior to the interviews. For very 

straightforward industries, one or two interviews may be sufficient. However, if the industry is 

very complex or has a large variety of different services, a larger number of interviews may be 

required. For complex industries, two or three initial interviews will be conducted and then the 

state of knowledge about the industry is evaluated, the goals and questions papers are revised 

 4 
prior to conducting further interviews. A report is prepared after each interview, outlining what 

was learned and what issues still require further research or interviews. At the conclusion of the 

research phase, a methodology paper is prepared that summarizes the results from all of the 

research. This paper also addresses all the issues that arose during research and defines the 

industry output, specifies how to measure that output, defines the service characteristics, and 

provides insight into how to maintain a constant quality price index for this industry. 

A comprehensive definition of the output of the industry must be developed. One of the best 

sources for the output definition is the System of National Accounts. In some cases, however, 

the definition in the SNA is not detailed enough for pricing an industry. Parameters that 

determine where the activity begins and ends are necessary to fully define the output of the 

service industry. In addition, the unit of measure corresponding to the defined output has to be 

identified. 

Primary output is the ultimate service or product produced by an industry. With the exception of 

government operated or subsidized establishments, the output is generally the service or 

product that is traded on a market and has a price associated with it. For many industries, 

primary output is clear and easily defined. The trucking industries, for example, define their 

primary output as the transportation of goods from point A to point B. For the broadcasting 

industries, the output is not as clearly defined. Initially, it appears that stations produce a 

broadcast signal. However, this signal is delivered free of charge to the viewers and listeners, 

and therefore does not qualify as output according to PPI definition. What is bought and sold in 

these industries is access to an audience through the broadcast signal. This access is sold to 

advertisers through the sale of airtime. Retail trade and wholesale trade are sectors for which it 

is conceptually difficult to determine the primary output. After much research, PPI used the 

national accounts definition of trades. The output of the industries in these sectors is the 

provision of a marketing service, not the production of the good that is sold. The price of the 

good being sold is integral to the calculation of the price for the marketing service. However, 

since the service that is provided is marketing, the value of the good that is sold is not included 

in the net transaction price for this service. This is similar to the transportation industries where 

the value of the good being transported has a direct effect on the price charged for the 

transportation service but the value of the transported good is not included in the price of the 

transportation service. 

A pricing methodology must be developed that accurately measures the price changes over 

time for the defined output. As seen in the example of broadcasting, developing a methodology 

for pricing the defined output is not always straightforward. But developing the methodology is 

an important step. If a methodology for pricing the defined output cannot be developed, then 

the current output definition is called into question. For some industries, multiple pricing 

methodologies need to be developed to measure output, owing to the diverse services within 

the output definition, each of which requires different pricing. For other industries, different 

companies may keep records or provide the service in very diverse manners. In these cases, 

multiple pricing methodologies may be used to measure the same output. 

Identifying the service characteristics of the industry is another important step in the research 

process. The major components of the service customarily associated with the output need to 

be identified. These detailed service characteristics are used to ensure that the same service is 

priced over time. However, care must be taken to distinguish between characteristics that are 

price determining and cost factors that are not. The identification of the cost components of 

providing a service does not necessarily result in knowing the precise service or the final price 

of that service. For instance, while the cost of fuel is a major price determinant in the airline 

 5 
industry, it is not a factor that uniquely identifies a particular service sold. For example, 

knowledge of the amount of fuel used does not result in knowing the price for a flight. In 

contrast, for the car rental industry, knowing how much fuel was purchased helps determine the 

fuel charge that is added to the base rate of the rental. 

The final stage of the research phase is the analysis of the services provided by the industry to 

determine how to maintain a constant quality service over time. For the defined output of a 

service industry, a determination is made whether there is a need to use adjustments or 

updates to the services to maintain constant quality. If the services are variable over time, an 

appropriate quality adjustment methodology is explored. 

Note that in some cases the price calculation methodology that was chosen may produce a 

constant quality price index without the need for an explicit quality adjustment strategy. 

Examples of these constant quality pricing methodologies in the past have included the use of 

unit value pricing or average pricing. In addition, for some industries, certain variables are held 

constant over time or a model pricing methodology is used that greatly reduces the need for 

quality adjustments. For some industries, additional variables are collected to allow for quality 

adjustment over time. Whenever possible, a quality adjustment or constant quality strategy is 

identified prior to collection of the data in order to be able to collect data that fits with the 

selected strategy. 

2.2 Frame/Sample Research and Development 

Since revenue data are used as weights in the PPI, sampling by revenue is the ideal, implying 

that the ideal frame for sampling establishments would be Census Bureau’s Business Register, 

which provides information on total revenues by establishment (also referred to as value of 

shipments or turnover). However, due to confidentiality limitations, the US Business Register is 

not available for use by the PPI program. The alternative frame most generally used for 

sampling, especially for Mining and Manufacturing industries, is the BLS Quarterly Census of 

Establishments and Workers (QCEW), which provides a count of employees by establishments. 

This database is compiled from the unemployment insurance data that are filed in each state for 

establishments that have employees. For mining and manufacturing industries, there is 

generally a strong positive correlation between the number of employees and revenue data. 

However, for most service industries, there is very little correlation between the number of 

employees and revenue data. Due to the lack of access to the Census US Business Register, 

the PPI program is faced with a continual challenge of finding alternative sources of frame data 

for sampling of service industries and uses the BLS QCEW only as a fallback. Trade 

associations and government agencies are sometimes the best sources for the most 

appropriate frames for some of the service industries. However, in a few industries, 

stratification and weighting of the establishments have had to occur after data collection 

because there was insufficient data to sample appropriately. Some alternative frames that are 

used do not have revenue data as a basis for sampling. In these industries, an alternative size 

measure data in the frame is selected that closely relates to the output of the industry. For 

example, in cable TV, the lack of revenue data resulted in the use of the number of subscribers 

as the relevant size measure. 

Once the appropriate frame source has been selected for a service industry, frame refinement is 

conducted to locate and verify the establishment’s location and industry classification. For 

each industry, the general location for collecting the data for the PMC is determined. This 

location may be a national headquarters, the local units or somewhere between these two. 

 6 
However, for many industries, frame refinement can only be done for the largest establishments 

in the industry since the frame contains so many establishments. 

During the collection visit, sampling is done on the establishment revenue data in order to select 

representative services to price over time. The same probability-proportionate-to-size (PPS) 

sampling that is used in manufacturing industries is used in service industries. In a few 

industries, the items to be priced are selected from a national sample of services prior to the 

data collection visit. Item sampling prior to data collection is generally used when an industry 

has a large and diverse number of services and the PPS sampling would be very difficult to 

complete with company data at the data collection interview. An example of an industry where 

items were selected prior to data collection is hospitals. 

2.3 Development of Collection Materials 

From the research that was done in the first phase of the development of the service industry, 

procedures for the collection of the service data are developed. These procedures detail how 

the prices are calculated for the various services provided by the industry and what data are 

required to perform the price calculation. These procedures may also include locating the 

appropriate establishment, identifying the most likely respondent in an establishment, 

assembling information on discounting or price variations and how to apply them, and 

developing information on the monthly pricing instructions to provide to the respondent. 

Also developed from the research that was done in the first phase of the development of the 

service industry are data collection materials. These materials include a detailed paper that 

describes all the characteristics of the industry, the frame and sampling sources, and 

procedures and any other additional information about the service industry. A list of all price 

determining characteristics that were defined in the research phase is used for developing a 

checklist that describes the exact services selected. These checklists include all possible 

characteristics (including non-price determining) that a service may have and some ‘all other’ 

lines for recording more detailed descriptions. 

After the collection procedures and materials for data collection have been developed, the final 

phase of the development process of the collection materials is the preparation of the training. 

This training is done in a variety of formats – in person, video, conference call or computerbased training. This training is given to all of the staff (field economists) that will be collecting 

data for a particular service industry and their supervisors. The development of the training 

materials also serves as an additional review of the procedures and materials. For many 

service industries, prior to the development of the training, selected field economists who will be 

collecting the data are asked to pretest the procedures and materials in order to determine if 

they meet the needs of the field economists, have covered all the procedures, and have 

properly defined all of the services and their characteristics. 

2.4 Review of Data/Publication 

After the data has been collected from the establishment by the field economists, they are 

reviewed and monthly repricing begins. In a few industries repricing is conducted less 

frequently than monthly, consistent with observed market pricing mechanisms. For example, 

portfolio managers are only paid on a quarterly basis. Automobile insurance is a highly 

regulated industry and premiums for each automobile insurance policy is fixed for at least six 

months and so the policies are repriced when the premium is updated. 

 7 
Calculation of test indices usually begins within 6 months after the start of repricing. Review of 

test indices and their underlying micro data help to identify outliers and any specific, and in 

some cases, systemic problems with the pricing of certain services. Communication with 

respondents is critical during this phase to resolve specific measurement and interpretation 

issues, educate them on reporting requirements and, as appropriate, the need for additional 

information in order to ensure that the same constant quality service is priced over time. The 

data in the test indices are also analyzed to determine if the correct price movement over time is 

being shown in the indices. If the correct output definition was used with the correct pricing 

methodology, then the index data should show a predictable price movement over time. 

Analysis of the time series data is used to validate the output definition and pricing 

methodology. In determining whether or not the output definition, pricing methodology, and 

quality adjustment strategy are appropriate for an industry, the national income accounts are 

also utilized to examine the performance of the test index as a deflator. 

After the test indices are reviewed and determined to be of sufficient quality, publication of the 

data is planned. If there were changes made to the pricing methodology during the test index 

phase, then the data series has to be rebased or started over and test data are not published. If 

the test index data did not require any changes to the pricing methodology and there was 

sufficient coverage for the entire test period, then the test index data can be published when the 

service industry indices are published. Also during the preparation for publication phase, a 

short article describing the pricing methodology and announcing the publication of a new service 

industry is prepared. This short article will appear in the PPI Detailed Report and on the PPI 

website. 

2.5 Keeping the Service Indices Up to Date 

 

A constant challenge for the PPI program that occurs in both services and manufacturing PPI is 

keeping the services price indices up to date. The PPI is a modified Laspeyres index based on 

the fixed input output price index concept, or FIOPI (see Robert B. Archibald, “On the Theory of 

Industrial Price Measurement: Output Price Indexes,” Annals of Economic and Social 

Measurement, winter 1977). While adhering to the FIOPI model is conceptually correct for the 

PPI, there is a danger that the services being priced will no longer represent current market 

conditions. In order to ensure that the indices are representative, several strategies have been 

developed to reduce or eliminate new item bias. New item bias could occur in industries where 

there is rapid service or product development that cannot be captured by the usual resampling 

process. In the US PPI, resampling occurs roughly every seven years. When a new sample 

replaces the old sample, it is important that comparable items are priced in both samples lest 

the new item bias be created. 

One of the methods used to ensure that there is no new item bias in the PPI is referred to as 

directed substitution. New item bias would occur if the service or items being priced in the 

index were no longer reflective of the current mix of services or items in the market place. A 

procedure is used to verify that there is no new item bias or to direct the researcher to substitute 

to items to ensure that there is no new item basis for the industry. The researcher contacts the 

current respondents in the PPI sample for an industry and obtains data about the distribution of 

their items by revenue. If the new distribution of revenue for items deviates significantly from 

the items currently being priced, a sampling technique is used to select new items to price. If 

the new distribution of revenue for items does not deviate from the distribution of the current 

items being priced, then no substitution is necessary. Therefore, the procedures used during 

the review of monthly price data have kept the items being priced current and no new item bias 

exists. This procedure was used every year in the late 1990s and every other year since then 

 8 
for the PPI Software Publishing industry. This procedure ensured that the software priced in the 

PPI is representative of the market for software. This directed substitution is used when the 

new items or new services are provided or produced by currently sampled establishments. 

Directed substitution is performed as needed for all industries, including services, in the PPI 

sample. This procedure does not materially increase the reporting burden for the 

establishments that are currently reporting data to the PPI. 

Another procedure that is used to keep the PPI service indices up to date is sample 

augmentation. Sample augmentation is used when there are industries with rapid changes in 

services being provided. Sample augmentation may be performed to add additional items to 

current establishments. In order to incorporate the newest services, additional service items are 

requested from establishments that are currently providing data for that industry. This method is 

used selectively due to the increase in establishment burden. Sample augmentation is also 

used to add additional establishments to an industry. Many times the newest services are being 

provided by new entrants into the industry. New establishments are selected and new services 

from those establishments are added to the current PPI index, thereby, ensuring the index is up 

to date. 

Another method for keeping the index up to date is the use of quality adjustment. Quality 

adjustments are used to maintain constant quality price indices where the services provided 

have changed. When price-determining characteristics change (change in output), the FIOPI 

concept is violated. The corresponding input changes are utilized to disentangle price changes 

from changes in the production function. The preferred quality adjustment method for PPI is to 

use the production or provider cost difference between the old items and the new items. The 

production or provider cost differences are used to net out the price differences between the 

items and have the index reflected only pure price change. For example, in the cable TV 

industry, provider cost is usually available to quality adjust for changes in the channels provided 

to customers. In some service industries, there is limited information on providers’ costs to use 

for quality adjustment. 

In some industries, the pricing method selected removes the need for quality adjustments. For 

example, in the cellular telephone industry, unit value pricing methods are used to collect 

monthly price data. Using this method all plans are included in the pricing so that when plans 

change there is no need to quality adjust. One of the reasons that this pricing method was 

selected was that establishments in the cellular telephone industry tend to change plans 

frequently. 

Hedonic models have been used to determine a value of quality adjustment if there are 

sufficient item data available. For retail trade industries, hedonic models have been attempted 

for several industries. Retail trade was selected to try hedonic modeling for quality adjustment 

because of the unique characteristics of the industry. The output of the industry is marketing 

and is measured by margins. Products are selected to determine the margin, but quality 

adjustment would not be based on the products themselves. Quality adjustment would be 

required for retail trade establishments when the service characteristics performed by the 

establishment change. Therefore, hedonics can be used to quantify the changes in the 

characteristics such as hours of operation, number of checkouts and other similar features. A 

hedonic model for quality adjustment was unsuccessfully attempted for grocery stores. The 

model was not successful because the dispersion of the margins on the different products was 

too diverse. A successful hedonic model for quality adjustment has been developed and is 

currently in use for liquor stores. The hedonic model for liquor stores was successful because 

the margins and products were very homogenous. 

 9 
Additional alternative quality adjustment methods have been implemented for several service 

industries. An example of alternative quality adjustment is nursing care facilities. A 

methodology for quality adjusting nursing care facilities was instituted utilizing government 

inspection data on staff hours in conjunction with wage data on health care jobs. 

3 Industry/Sector Methodologies and Challenges 

This section highlights the methodologies implemented for a selection of service industries and 

sectors. Specifically included are discussions of output measurement, pricing characteristics, 

sample unit identification, and frame and sampling issues. The industries and sectors selected 

best illustrate the challenges faced in developing pricing methodologies for service industries. 

3.1 Finance and Insurance 

3.1.1 Banking 

3.1.1.1 Output Measurement 

Output definition 

The primary output of the banking industry is the provision of financial services including 

financial intermediation. For this industry, financial intermediation can be defined as the 

assumption of risk that arises from taking money from depositors and lending it to borrowers. 

The output can be further defined by the specific types of services provided by banks. The 

major service lines follow: 

• Loans – Loans are assets of a bank defined as funds advanced to a borrower to be repaid 

at a later date, usually with interest. Included in the loan category are residential real estate, 

nonresidential real estate, home equity, commercial and industrial, agricultural, new and 

used auto, and credit card loans. 

• Deposits - liabilities of a bank defined as funds placed with a bank in an account subject to 

withdrawal. Included in the deposit category are demand, time, and savings accounts. 

• Trust services - Trust activities involve the bank's acting in a fiduciary capacity for an 

individual or a legal entity, such as a corporation or an individual’s estate. This typically 

involves holding and managing trust assets for the benefit of a third party. 

• Other banking services – These services include standby letters of credit, correspondent 

banking, sale of securities, cash management and other miscellaneous services. 

Pricing methodologies 

One of the primary challenges in this industry is to measure financial intermediation services 

indirectly measured or FISIM. Banks often provide services for which they do not explicitly 

charge by paying or charging different rates of interest to lenders and borrowers. They pay 

lower rates of interest than would otherwise be the case to those who lend them money and 

charge higher rates of interest to those who borrow from them. The resulting net revenues of 

 10 
interest are used to defray their expenses and provide an operating surplus. This scheme of 

interest rates avoids the need to charge customers individually for services provided and leads 

to the pattern of interest rates observed in practice1

. 

Thus, it is necessary to develop a methodology that not only captures directly priced services 

but also reflects services priced indirectly. This methodology must allow interest to be allocated 

between loans and deposits. 

The user cost methodology is implemented in the PPI. The user cost for a financial service is 

the difference between its revenue and the sum of its implicit and explicit costs. To measure 

these implicit costs, interest is allocated between loans and deposits by means of a “reference 

rate.” The reference rate is the opportunity cost rate of money from which the risk premium is 

eliminated to the greatest extent possible and which does not include any intermediation 

services2

. In theory, the price of a loan is equal to the asset holding rate less a reference rate. 

The asset holding rate is the interest received plus service charges. For deposits, the price is 

equal to a reference rate less the liability holding cost rate. The liability holding cost rate is the 

interest paid to depositors less service charges. 

In measuring the prices for both loans and deposits, the same reference rate is used. Using two 

different rates could result in double counting, which would overstate price movement, or part of 

the output price could be missed, which would understate price movement. Currently, the 

reference rate is the weighted average of all banks’ holdings of U.S. Treasury securities. 

In practice, the price of these services can be expressed as shown below. Again, both services 

are priced at the portfolio level. 

1000$* ⎥

⎦

⎤ ⎢

⎣

⎡ ⎟ −

⎠

⎞ ⎜

⎝

⎛ + = rate Reference

balance loan Average

Fees income interest Earned Price Loan

Earned interest income includes all interest actually received in a given month for the portfolio of 

loans being priced. This includes interest earned on both old and new loans. The average 

loan balance is calculated by averaging the ending daily balances of the loans in the portfolio 

over the month. 

1000$* ⎥

⎦

⎤ ⎢

⎣

⎡ ⎟

⎠

⎞ ⎜

⎝

⎛ = balance deposit Average

fees Earned - payments Interest - rate Reference Price Deposit

Interest payments include all interest actually paid to depositors on the funds held in the 

portfolio in a given month. Earned fees should include all fees, such as those for ATM 

withdrawals or insufficient funds, that are actually collected by the bank. Again, the deposit 

balance is calculated by taking the average of the ending daily balances of the portfolio. 

For both equations, the calculation within the outer brackets results in a rate. This rate is 

multiplied by $1000 to convert the rate to the dollar value used in index calculation. When the 

 

1

 1993 System of National Accounts 

2

 Ibid. 

 11 
price is positive, the service will be considered on output. However, whenever the price is 

negative, the service will be considered an input and the price will be excluded from index 

calculation until it becomes positive. 

For trust and all other banking services, the price is equal to the actual fee charged for 

performing the service. These fees can be a percentage of assets or a flat fee. 

3.1.1.2 Service/Pricing Characteristics 

For loans and deposits, the unique item to be priced is represented by a homogeneous portfolio 

of accounts (e.g. all 15-year fixed rate residential mortgages or all 1-year certificates of deposit). 

Trusts and other banking services are priced by selecting an individual transaction. 

Once the actual service is selected, its price determining characteristics are identified to permit 

monthly repricing of the same unique item. The following characteristics are common for most 

services: 

• Type of service (e.g. mortgage loans, money market savings account, trust) 

• Term of service (e.g. 15-year loan, 5-year certificate of deposit) 

• Type of fees (e.g. late payment, automatic teller machine, early withdrawal penalty) 

Constant quality measurement issues 

A fundamental issue in pricing banking services is the ability to maintain constant quality. 

Particular to these services is the need to keep monetary values stated in terms of constant 

dollars. Periodically, certain values included in the price calculations are to be adjusted by the 

GDP chain-type price index to account for the time value of money. It is the $1000 conversion 

factor that is to be adjusted for loans and deposits. For other services for which the price is 

based on the value of assets, such as trust services, the assets will be adjusted.

3.1.1.3 Sample Unit Identification and Frame and Sampling Issues 

The sample was divided into two tiers: small banks and large banks. 

Small Banks 

The sample unit is the bank's headquarters. It may be the case that a sample unit operates both 

as the bank's headquarters as well as the bank's branch. This may be the case for small rural 

banks. There will also be instances where the bank's holding company may be located in the 

same building as the bank's headquarters 

The “small” banks were sampled as the “whole” bank. That is, all output of the banks was given 

a chance of selection 

Large Banks 

The “large” banks were sampled by department. Keep in mind that these are BLS-created 

departments. That is, they may not match the actual department structure of the sample unit. 

There are seven department designations: 

 12 
• Mortgage Loans 

• Agricultural Loans 

• Commercial Loans 

• Consumer and Other Loan Services 

• Retail 

• Trust services 

• Other banking services 

The retail department refers to “deposits.” Only the output of the sampled department is eligible 

for selection 

The frame used for the banking industries was a file provided by the Federal Deposit Insurance 

Corporation. This file provided a comprehensive list of commercial banks and savings 

institutions and revenue for each entity. However, the file did not provide departmental data 

necessary for sampling the larger banks. Therefore, departments were created and given an 

equal chance of selection within each of these banks. 

The sample for this industry was drawn in two stages. For the first stage sample, banks were 

chosen by probability proportionate-to-size sampling based on revenue. For the second stage 

sample, selections were made from the set of BLS defined departments for each bank in the top 

half of the sample. This created multiple sample units for a single bank in most cases. 

The services to be priced were pre-selected. For loans and deposits, the unique item to be 

priced is represented by a homogeneous group of accounts (e.g. all 15-year fixed rate 

residential mortgages or all 1-year certificates of deposit). Trusts and other banking services 

are priced by selecting an individual transaction. 

Government Regulations 

Because of its close association to the economic stability of the U.S., the banking industry will 

always be under close watch by regulators. The operation of the banking system is essential to 

the economic well being of a nation. Therefore, the banking system cannot be subjected to fail. 

Before failure is eminent, banks try to control expenses by mergers and consolidations. 

Much of this profuse regulation stemmed from the 1929 depression when the banking industry 

collapsed. The first of many regulations that followed is the Glass-Steagall Act of 1933, which 

prohibits payments of interest on demand deposits, establishes the FDIC, establishes interest 

rate ceilings on savings and time deposits, and most importantly separates banking from 

investment banking. 

This separation of banking activities from other financial services allows the PPI to accurately 

define the profit maximizing center for all units in the sample frame. 

 13 
3.1.2 Insurance 

3.1.2.1 Output Measurement 

Output definition 

The primary output of the insurance sector is the assumption of risk (transfer of risk from the 

policyholder) and financial intermediation. In these industries, financial intermediation is the 

investing of someone else’s money with the goal of partially offsetting the size of the premium 

payment. 

The policy underwritten by the insurer represents the unique output. The policy lists the 

coverages for which restitution would be made to the policyholder to cover claims. The amount 

of risk being transferred to the insurer is clearly stated in terms of covered benefits (and benefits 

not covered) and it obligates the insurer to pay claims for all such occurrences. So, the output 

is the transfer of the risk of financial loss from the policyholder to the insurance company. 

Pricing methodologies 

General methodology 

The operational definition of assumption of risk plus financial intermediation is premium plus 

rate of return on investment. Investment income is crucially important to the industry and 

greatly affects their pricing decisions and its inclusion should yield a smoother statistic that 

would facilitate the regulatory decision-making process. Companies may well reduce premiums 

when the rate of return increased in response to competitive pressures, as well as raise 

premiums when the rate of return is lower. 

Thus, the price can be expressed as 

Price = Premium (1 + r) 

where r is the annual return on the invested portion of the premium for the particular type of 

insurance that is being priced. This rate is stated as a percentage of all premiums paid. 

There are mutual companies whose policyholders are also the stockholders of the company. 

These companies typically pay out a dividend rebate to the policyholders on an annual basis. In 

such cases, the dividend would be subtracted from the premium to obtain a net transaction 

price. This price can be expressed as 

Price = Premium (1 + r) - Dividend 

To track premium movement in the property and casualty industry, companies provide 

estimated premiums for model policies. This is an actual policy selected by probability where 

the premium determining characteristics are held constant while the policy is repriced on a 

monthly basis. The insurance company estimates the current premium for this model policy by 

using current charges applied to the policy characteristics of the actual policy. This premium 

remains unchanged until the policy is priced again the following year. 

 14 
The major difference in repricing a model policy versus repricing an actual policy is that the 

insured may modify the policy over time. For example, an auto policyholder could add a 

teenage driver in year two of the policy, increase the liability, or reduce the deductible. Such a 

change in the repriced item violates the Laspeyres assumption of fixed quality. By holding the 

policy characteristics constant, the fixed quality assumption is realized. 

In order to hold inflation-sensitive characteristics constant, periodic adjustments are made to 

account for inflation. For homeowners insurance, the dollar limit of coverage is adjusted 

annually to account for construction price inflation. The assumption is that the policyholder is 

insuring to secure a constant flow of services from the insured property. If there is price inflation 

affecting the cost of repair or replacement of the damaged property, the coverage limit should 

be escalated to reflect this increase. This adjustment is made annually on the anniversary date 

of the policy. This reflects what actually occurs – where the company makes these coverage 

adjustments at the time of policy renewal. As the index is tracking several thousand policies 

selected on a probability basis, there is a spread of policy anniversary dates throughout the 

year. This yields a smoother behaving index than making this adjustment for all repriced items 

at one time. 

The source to be used for the escalation is dependent upon the insurance company. If the 

company cannot make a recommendation as to how the inflation-sensitive policy characteristics 

should be adjusted, PPI decides the appropriate index to use. For example, the E. H. Boeckh 

Building Cost Index is used to escalate the coverage limit for homeowners insurance. A 

different procedure will be used for Workers Compensation Insurance. The workforce in the 

group is held constant (same number of people in the same jobs), but the wage rates are 

adjusted to account for general wage inflation. In this case, the Bureau of Labor Statistics’ 

Employment Cost Index is used. 

The investment rate of return is calculated by all insurance companies as a percentage of the 

premium. An annual report is prepared by all companies which includes this calculation. The 

report provides the investment rate of return by insurance line calculated as a percent of 

premium. As with the inflation-sensitive policy characteristics, the rate of return is updated 

annually for each priced item on the policy anniversary date. 

Life insurance 

In general, the premiums for life insurance policies are level and correspond to the age and sex 

of the policyholder as well as the duration of the policy. For whole life, the premium is one that 

allows the policy to endow at the age of 95 or 100. That is, we obtain the premium that allows 

the cash value to equal the death benefit when the insured reaches 95 or 100 years of age. 

However, for universal and variable products, premiums are not level as they are for term and 

whole life. These premiums vary at the discretion of the policyholder making them an inaccurate 

measure of output. For these particular products, policyholders may pay whatever premium 

they wish as long as they pay the minimum required to keep the policy in force. The 

policyholder bears some of the risk and, in return, the policyholder gets to capitalize on the 

potential for increased saving or increased death benefits using the policy as an investment 

vehicle. Since the death benefit is held constant, the premium varies when the policyholder 

adjusts the amount of money they are saving or investing. These additional or increased 

premiums, which increase the savings, should not be reflected in the index as price increases. 

Therefore, pricing of premiums for universal, variable, and variable universal life insurance 

would be a meaningless way to measure price change. 

 15 
Instead of measuring premiums, extracting the various fees charged to administer the policy 

measures the output of these policies, taking the total fees as the price. While this seems to be 

the ideal way to measure the price, much as the formula suggests, this can only be done for the 

variable and universal products. Therefore, type of price for these policies is a combination of 

the various fees assessed for the provision of the policy. These total fees represent the 

expenses or costs listed on the right side of this equation: 

Premium (1 + r) = MC + EXP + P +C 

where r = earned rate on investments, MC = mortality costs, EXP = expenses, P = profits, and C 

= contingency allowances. 

Annuities 

Although companies receive a consideration, or premium, for provision of an annuity, they only 

retain a portion of it. The other portion is invested on behalf of the annuitant. The price to be 

collected is the same for both individual and group annuities. All money invested, net of any 

fees and/or interest retained by the insurance company, is intended to be returned to the 

annuitant. The outputs from annuities are measured by fees and/or interest. 

For variable deferred annuities, the fee methodology used for universal and variable insurance 

was adapted to measure the output of these annuities. Fees charged for provision of these 

annuities are generally some percentage of the account value. These fees cover expenses, 

mortality risks, and investment management.

• Mortality and expense risk charge - charge for mortality and expense risks. It is typically a 

percentage of the account value and can be expressed in terms of an annual percentage. 

• Administrative charge - annual fee is deducted from the annuity account value for the costs 

of administering the annuity. 

• Investment advisory fee - fee assessed for advisory services provided in association with the 

annuity portfolio.

Therefore, the total fees are the PPI “price”. The earned rate on investments will be used to 

adjust the account values for repricing purposes. This rate will not be added to the ‘price’. 

For fixed-rate annuities, companies only earn revenue from the difference in the interest that 

they earn and interest that they credit to the annuitant. The difference is applied to the account 

value. In addition to this interest spread, companies may charge a flat administrative fee. 

Immediate annuities seemed more difficult to price due to concerns with mortality costs. 

Companies say that the best measure for price change is their actuarial rate. This is the rate at 

which they derive the premium or consideration. It is calculated as the present value of the 

payment of one dollar every month for the expected duration of the annuity. It can be obtained 

by dividing the premium paid by the monthly payout or by taking the reciprocal of the payout 

rate per $1000. Companies say that this rate is loaded with expected expenses, profits, and 

mortality costs. An example is the sale of an annuity with a payout to the annuitant of $12 per 

$1000 of premium. The "price" paid by the annuitant to purchase the annuity is $83.33 per $1 

of benefit (=$1000/$12). 

 16 
Companies can also earn an interest spread as they do for fixed-rate annuities. Another option 

is to price the front-end load earned on the premium. This is typically a small percentage of the 

total premium. 

3.1.2.2 Service/Pricing Characteristics 

Actual policies were chosen by probability proportionate-to-size sampling based on certain price 

determining characteristics of the policies. Once an actual policy is selected, its price 

determining characteristics are identified to permit repricing of the same unique item. The 

following policy characteristics are common: 

Property and casualty insurance 

• Type of property or risk - provides the characteristics of the insured property. 

• Type of coverage - includes physical damage coverage and liability coverage. 

• Dollar limit of coverage - maximum amount of money the insurer is legally obligated to pay in 

the event of a claim. 

• Coinsurance clause - percent of the value of the property to be reimbursed by the insurer. 

• Deductible - insured bears the first part of any loss covered by the policy up to a specified 

amount. 

• Length of policy period - time frame for which the policy is in effect. 

• Perils covered - specific risks that the insurer assumes. 

• Location of the insured property - risks vary by geographic location. 

• Past loss experience - premiums generally are lower if the insured has a past record of 

making fewer claims. 

• Valuation of insured property - either the actual cash value of the property, which adjusts for 

depreciation, or the replacement cost. 

• Valuation of risk exposure - valuation for liability coverage. 

Life insurance 

• Type of policy - whether the policy is term, whole life, universal, etc. will have an effect on 

the premium amount. Premiums for term tend to be lower. 

• Age of insured - the older the insured, the higher premiums will be due to increasing. 

• Sex of insured - premiums tend to be higher for males than for females since males. 

• Face amount of policy - premiums will increase as the amount of coverage increases 

in order to cover potential claims. 

 17 
• Smoker/non-smoker - premiums tend to be higher for people who smoke due to health risks 

which increase mortality. 

• Health of insured - the healthier the insured, the lower the premiums will be since chance of 

premature death is expected to be lower. 

• Duration of the policy - the nth year of the policy (i.e. 1st year, 5th year, etc.). Premiums or 

fees may change depending on how the long the policy has been in force. 

• Riders - policy may have a provision for additional coverage called a rider. These riders 

may provide additional coverage for spouse or children of the insured. Riders will increase 

the premium otherwise payable. 

Health insurance 

• Type of coverage - underwriters will require different information in order to provide prices 

for medical service plans, long-term care, and other services. 

• Amount of coverage (richness of benefits) – includes the number of covered services, the 

dollar amount of coverage for each service, and the maximum dollar amount of coverage.

• Census class - prices for the same service within the same group will differ according to the 

rate or census class. Generally, families will pay a higher premium than an individual within 

the same group plan. 

• Voluntary vs. non-voluntary (contributory vs. non-contributory) - voluntary (contributory) 

group policies will be defined as policies for which the employee pays 100% of the premium. 

Non-voluntary (non-contributory) group policies will be defined as policies whereby the 

employer pays 100% of the premium. The percentage contribution of the employer or the 

employee can vary anywhere between 0.0 and 100.0%. 

• Group composition - the combination of gender and age ranges is an important factor in 

determining the premium. Therefore, companies require the age and gender of each person 

covered by the policy, including spouses and children. 

• Medical history - previously healthy people will generally pay lower premiums than those 

who have a record of health care utilization. 

• Occupation -people employed in dangerous occupations will generally pay more than those 

in sedentary, low risk occupations. The classification code (NAICS or SIC) of the industry is 

usually used for underwriting purposes. 

• Geographic location - people who live in areas in which natural disasters often occur and/or 

pollution is a problem will generally pay higher premiums than those who do not. The zip 

code (usually the first three digits) is used for underwriting purposes. For large groups, or 

small groups which are geographically dispersed, several zip codes/geographic regions may 

apply. However, a national rate may be used if a group is very well dispersed throughout 

the nation. 

 18 
• Earnings - As incomes rise, utilization rates tend to increase. Thus, premiums tend to 

increase as income increases as well. Earnings will be most important in determining a 

price for accident insurance. Maximum benefits paid are usually based on income. 

• Smoking Status - Smokers generally pay higher premiums than non-smokers. 

Constant quality measurement issues 

The fundamental issue in pricing insurance services over time is the ability to identify and adjust 

for changes in risk. For changes in explicitly endogenous risk factors such as changes in 

coverage or deductibles, companies have suitable cost data to allow for meaningful cost based 

quality adjustment. However, for changes in exogenous risk factors that go beyond the scope 

of policy negotiations, such as an increased incidence of theft or a severe hurricane season, 

company specific data would be not be sufficient to definitively quantify risk. Only outside data 

sources will be able to identify short-term vs. long-term changes in risk. 

 

Such an outside data source is used in the quality adjustment of private passenger auto 

insurance where risk changes occur even though the age of the insured auto remains the same. 

To keep the age constant, the model year of the auto is updated once a year to the next model 

year. For example, a 1996 Honda Accord is changed to a 1997 model. However, changing the 

model year can also move the auto into a different risk category known as a symbol group. 

Insurance companies are unable to assess this risk change on their own, but a valuation can be 

obtained from Insurance Services Office (ISO). This organization pools risk information 

industry-wide, producing data which is broader in scope than any that one company could 

gather on its own. The ISO assigns autos to symbol groups based on their risk characteristics. 

For PPI purposes, the ISO provides the value of risk change for every auto included in the 

index. The ISO monitors the symbol group that is assigned to an auto and the particular risk 

associated with that symbol group. When an auto moves into a different symbol group, ISO 

assigns a value to the risk change that occurs. This value is then used to explicitly quality 

adjust the premium used in the PPI. Therefore, the risk changes are not reflected in the index 

as price changes. 

However, it is not always clear that we would know when a shift in underlying risk truly occurred. 

Over the past few years, claims for mold damage have increased significantly. Has the climate 

changed such that there is increased risk of mold? Are policyholders just making more claims 

against their homeowner’s policy? Decisions must be made in real time, and sufficient data 

simply may not be available in the current month to identify and quantify the effect of these 

changes. Mold has always existed, but until 2001, mold was not a factor in the homeowner’s 

insurance market. However, public anxiety over major lawsuits in Texas and California have led 

to an increase in claims due to water damage (mold was only covered by policies if it was 

related to a covered peril such as a burst pipe). As a result, the increase in costs has driven 

premiums upward. Do we quality adjust these premium increases that occurred to help cover 

the higher claims since 2001? In the PPI, it has been treated as an increase in utilization as 

there has been no observable shift in weather patterns to indicate a change in risk. 

Another issue is the new item bias that can be present in both repricing methodologies. 

However, this bias may be especially problematic when pricing a frozen policy. Over time, this 

policy may no longer be representative. Mandated coverages may change or new insurance 

products may be introduced. Although bias may be not be as prevalent when following an 

actual policy, it can occur if the general population has changed their preferences for the type of 

 19 
insurance product that they purchase or if the policy represents a smaller portion of the 

company’s business. 

The PPI program has developed a “directed substitution” procedure to reduce new item bias. 

This procedure captures evolutionary changes to a current product or service that did not exist 

when the sample was selected. Periodically, each company will be contacted in order to review 

the insurance products included in the sample. The existence of these evolutionary changes in 

the industry will be identified and disaggregation will be performed to determine if a substitution 

should be made from the current product to an evolutionary product or to add the new feature to 

the description of the current product. Producer cost based quality adjustment will then be 

attempted to adjust for these changes. 

3.1.2.3 Sample Unit Identification and Frame and Sampling Issues 

Most insurance companies are affiliated with an insurance group. The sample unit location for 

these companies is the group headquarters. For single establishments with no group affiliation, 

the sample unit is the company headquarters. 

Many companies may operate in more than one insurance industry. Therefore, it was 

necessary to create separate profit maximizing centers (PMC) for each type of insurance within 

each company. For property and casualty insurance, the PMC was further broken down by line 

of insurance. 

The A.M. Best Company’s Key Rating Guide was the frame source for all insurance industries. 

This frame provided the necessary information to create the appropriate PMCs for each 

industry. In addition, premium revenue was provided as a measure of size. 

Government Regulations 

Each state regulates the insurance companies operating within its boundaries. All companies 

are required to file an annual statement with the state insurance commission. In addition there 

are three separate filings for property and casualty, life, and health insurance business 

activities. Thus, PPI can divide the frame units into the appropriate PMCs for each insurance 

industry. 

3.2 Real Estate and Rental 

3.2.1 Lessors of Nonresidential Buildings 

3.2.1.1 Output Measurement 

Output definition 

Two primary outputs can be measured for this industry. The first is providing the physical space 

and the second is management of the property (Note: this usually does not apply to pier and 

dock owners). Physical space can vary in size and functionality depending upon the needs of 

the tenant. Owners provide some degree of management of the rented space. This 

management can consist of any service necessary to keep a rented property in operation. 

 20 
The provision of the physical space is typically not difficult to identify. Space is measured by the 

square footage of floor space. However, the management aspect can be difficult to identify. 

The management aspect is considered part of this industry if it is paid for, or provided by the 

owner. If the tenant reimburses the owner for a service, then it, too, is considered part of the 

output of this industry. In general, all management services that the owner provides to the 

tenant whether directly or indirectly through an outside contractor, are to be considered part of 

the output of this industry. For example, if an owner provides the daily cleaning to a rented 

office space, the service is considered provision of the space as well as the cleaning. If an 

owner provides utilities to a rented space (i.e. pays the utility bills), then the service output 

consists of provision of space and utilities. 

Pricing methodologies 

General methodology 

The type of price collected for retail, office and industrial buildings is an average gross rent per 

occupied square foot. This price will measure what tenants in a particular building pay on 

average for their rented space. It is to be used when collecting prices for retail, office, and 

industrial buildings. 

Average gross rent per occupied square foot was chosen as the type of price to collect because 

it eliminates the measurement of revenue fluctuations caused solely by changes in occupancy 

within a building. For example, in retail, anchors may not pay as much rent per square foot as 

other stores. If an anchor vacates a retail building then the price per occupied square foot could 

actually increase. This increase is an accurate reflection of price change. If the price per 

building, or gross leasable area (GLA) were to be collected instead, then there would be a 

decline in revenue or price. PPI should not reflect price changes simply due to changes in 

occupancy. Therefore, the rent per gross leasable area is not collected. 

Average gross rent per occupied square foot is to be calculated in the following manner: 

First, a building's gross rent for the month must be totaled. Gross rent is made up of a 

combination of all or any of the following rent components: 

• All base rents - This is the fixed amount that tenants are required to pay for the renting of 

property. It is independent of any other expenses, and usually remains constant throughout 

the length of the lease. 

• All percentage rents - This is a variable amount that retail tenants pay in addition to their 

base rent. Percentage rent is contingent upon retail sales, in that it is a percentage of a 

tenant's gross sales. The value to be included here is all percentage rents paid in the current 

month. This is not necessarily the same as all percentage rents earned in the current month 

(there is often a two month lag between when this type of rent is earned and when it is paid). 

• All storage rents - These are any additional rents that tenants pay for the use of storage 

facilities within a building. 

• All parking garage rents - These are rents that an owner receives from a tenant who rents a 

building's parking garage. This value is not to include any revenue that an owner receives 

from renting out individual parking spaces. Rather, it is to include only revenue derived from 

the renting of the entire facility to a tenant who then uses the facility to rent out individual 

 21 
spaces. If the owner is involved in running the parking facility in any way, these rents are 

treated as miscellaneous receipts for Automobile Parking. 

• All escalations - These are any adjustments made to base rents due to changes in the 

inflation rate or changes in the CPI index. 

• All operating expenses billed to the tenants by the owner - This includes all operating 

expenses that tenants pay separately to the building owner (not an outside provider), and 

that are not included in the base rent. This total also includes those operating expenses that 

are "pass-throughs", whereby the tenant reimburses the owner for an expense. For 

example, if an owner is charged for utilities by a power company, but passes this expense 

along to the tenants, the amount that is passed on is to be included as operating expense 

revenue (provided the owner includes the operating expense revenue as revenue or income 

and deducts utilities as expenses). Examples of operating expenses may include any or all 

of the following: utilities, taxes, insurance, routine maintenance and repairs, and common 

area expenses. 

Next, sum all rents, escalations, and operating expenses listed above and deduct the value of 

all concessions offered during the month. Concessions, or rental abatements, are inducements 

offered to tenants that directly or indirectly lower the actual rent. They are often offered when 

owners are prohibited from lowering rents due to the terms and conditions of a mortgage loan. 

Some common concessions include: 

• Signing bonus - a tenant is given a sum of cash in reward for signing a lease with an owner. 

A tenant may receive $5,000 as an incentive to sign a lease with an owner. 

• Moving allowances - an owner reduces the burden of moving costs for a new tenant. This is 

done when an owner finances a portion of a tenant's moving expenses. For example, an 

owner may pay for the moving company when a tenant is ready to move into the owner's 

building. 

• Lease buy-out - an owner assumes a tenant's unexpired lease. This is contingent on the 

tenant renting space in the owner's building. For example, an owner may pay off the rest of 

a tenant's lease in another building in order for that tenant to move into the owner's building 

as soon as possible. 

• Tenant improvements (TIs) - an owner agrees to upgrade a space being rented by making a 

physical change to it. This is often necessary to meet the customized needs of a 

nonresidential building tenant. 

• Free rent - a tenant receives a certain number of free months rent from the owner. This can 

be taken up front or spread out over the course of the lease. Free rent should already be 

accounted for in the total for all base rents because it is rent not received. Therefore, avoid 

double counting, and do not include free rent under concessions when it is already 

accounted for in the base rent. In cases where free rent is not accounted for in the base rent 

or in any other rent component, however, deduct its value along with the value of all other 

concessions offered during the month. 

 22 
Finally, the building's total rent revenue (gross rent + operating expenses - concessions) is to be 

divided by the total occupied square footage in the building ("occupied" meaning rented). The 

resulting quotient will be the average gross rent per occupied square foot. 

Example: In one month, building A collects $300,000 in base rents, $15,000 in percentage 

rents and $45,000 in operating expenses for a total of $360,000. In the same month, the owner 

of building A offers $70,000 worth of concessions to the tenants in building A. The concession 

value is subtracted from the $360,000 to obtain a net rent total of $290,000. If the occupied 

square footage is 150,000 square feet, the average rent is $1.93 per occupied square foot 

($290,000 divided by 150,000 occupied sq. ft.). 

Auditoriums, theaters, and convention centers 

Average gross rent per occupied square foot pricing strategy does not work well with 

auditoriums, theaters and convention centers. Since the quantity and type of tenants renting 

these buildings varies each month, and each with a completely different income and cost 

structure, it would be misleading to collect an average price that includes all tenants. Instead, 

collect the average gross rent per performance for these types of buildings. 

To get this average gross rent per performance, one type of event must also be selected. Then, 

collect the value of all rent derived that month from all performances that are categorized as this 

type of event selected. Then, with these collected rents, an average price for this type of 

production can be tracked. For example, if the type of event selected is a rock concert, rent for 

rock concert performances would be collected. Then, with these rock concert rents, an average 

gross rent for rock concert performances would be calculated (the calculation would be as 

follows: total rents derived from rock concerts that month divided by the number of rock concert 

performances that month). 

In getting this average price, however, recurring leases must be selected. These leases cannot 

be for one-time events. They must be for events that take place often enough to be repriceable, 

(i.e., at least once a year). Also these leases must have similar cost factors and pricing 

arrangements with other performances under the same event. Preferably, it is the same event 

that comes back at least every year, such as an auto show, Ice Capades, Ringling Brothers 

Circus or the NBA's Boston Celtics. For plays and musicals, look not only for similarity in costs, 

but also similarity in popularity. 

Once selected, these leases must be priced. In other words, "gross rents" must be determined 

for these leases. Gross rents are the prices needed in order to come up with an average price 

for a particular type of performance. A gross rent for this property type is the sum of the 

following components: 

• Base rent - The base rent is the fixed amount that a tenant is required to pay for renting the 

property. This amount is independent of any operating expenses and other variables, and 

usually remains constant throughout the length of the lease (it may, however, be adjusted in 

accordance with the CPI). 

• Operating expenses - Operating expenses, or "house costs", refer to those costs to which 

the owner looks to the tenant for reimbursement. They are costs associated with the 

operation and production of an event, and that are paid by the tenant to the owner. Also 

known as "pass-throughs" (costs that are passed directly from the owner to the tenant), 

operating expenses usually generate no profit to the owner, but still are considered income 

 23 
to the owner and part of the total rent. The tenant's responsibility in paying operating 

expenses is contingent upon what is previously negotiated in the lease. 

• Percentage of gross box office - This refers to the portion of rent that is contingent upon box 

office sales. Under this arrangement, the tenant must pay a percentage of its gross box 

office revenue as part of its rent. The percentage charge will vary greatly, depending upon a 

tenant's base rent, past and/or expected gross box office volume and negotiations. 

Example: In one month, the XYZ Theater leases its building for five musicals. From these 

musicals, this theater collects $45,000 in base rents, $18,000 in operating expenses, and 

$9,000 as a percentage of the gross box office. The total rent collected from this event (i.e. 

musical) is $72,000 for the month. Dividing the total rent derived from musicals by the number of 

musical performances gives the average gross rent per performance. This quotient is $14,400. 

This means that the average gross rent per musical performance is $14,400. 

Piers and Docks 

The type of price collected for piers and docks is the gross rent per acre. This price, unlike the 

previous two types of prices, is to represent just one tenant. Hence, it is not an "average" gross 

rent. 

The gross rent represents the flat rental fee and the fee based on the amount of cargo 

throughput (that is, level of cargo tonnage handled) that is paid by a single tenant. To calculate 

the gross rent per acre, total both rent components (flat rental fee plus fees based on cargo 

throughput) and divide by the number of acres rented. The quotient is the gross rent per acre. 

Example: In one month, the owner of pier A collects a $150,000 flat rental fee from its tenant. In 

addition, this owner collects $20,000 in fees based on the tenant's handling of 40 tons of cargo 

($500 per ton). The gross rent total is $170,000. If the number of acres is four, the gross rent 

per acre is $42,500. 

3.2.1.2 Service/Pricing Characteristics 

The following outlines price determining characteristics for all nonresidential buildings in this 

industry: 

• Location - Nonresidential buildings located in areas conducive to their occupants' line of 

business generally receive higher average rents than their counterparts. Retail buildings, for 

example, located in heavily populated urban areas tend to receive higher average rents than 

retail buildings located in sparsely populated rural areas. 

• Quality of property - Nonresidential buildings are classified according to their physical 

condition, amenities, and age. Classifications include Class A, B, and C with A being the 

highest classification, followed by B and then C. 

• Management intensity - As the quality and/or quantity of services available to all tenants in a 

building increases, the average rent of a building increases as well. These services may 

include, among others, the following: security, elevator availability, and interior/exterior 

cleaning. 

 24 
The following outlines additional price determining characteristics for specific property types in 

this industry: 

• Number of anchors (retail property) - The average rent in a retail building (i.e. mall) is 

dependent upon the number of anchor tenants it houses. Anchor tenants are tenants that 

attract customers to a shopping center, and usually own the space they occupy. Because of 

these two factors, most anchors pay little or no rent, only common area maintenance and 

other operating expenses. 

• Level of sales (retail property) -Retail tenants typically pay a percentage of their gross sales 

revenue as part of their rent. 

• Percentage of seats made available (theater/auditorium) - Theater and auditorium property 

owners generally receive, as part of the rent, a percentage of a tenant's gross sales. 

• Number of berths (pier/dock) - A berth refers to the space allotted to a single ship or vessel 

on a pier or dock. The number of berths measures how many vessels or ships can be 

present at one pier/dock at any one time. It is a measure of size. 

• Cargo throughput (pier/dock property) - Rent for piers and docks is often dependent on the 

amount of cargo handled by the tenant. 

Constant quality measurement issues 

In general, the methodology of pricing the average gross rent per occupied square foot provides 

a constant quality measurement over time that does not need further adjustments. Adjustments 

are only necessary if there are major improvements or changes to the building. These types of 

changes would require quality adjustment, but are rare. These changes would include major 

renovations or remodeling of a building or shopping center. 

3.2.1.3 Sample Unit Identification and Frame and Sampling Issues 

Office and industrial buildings and retail shopping centers 

For office and industrial buildings, and retail shopping centers, the leasing agents were 

clustered by leasing company and then leasing companies were sampled. Then the leasing 

agents were selected within the leasing companies. Then buildings were selected for the 

sampled leasing agents. Therefore, the sample unit is the leasing agent. 

For all types of properties, disaggregation was performed to select the actual building(s) (or 

shopping center, etc.) for which data were to be collected. If part of the selected building is 

owner-occupied, that portion is not included in this industry and was excluded from collection. 

The frame source for office and industrial buildings was a database provided by CoStar, one of 

the leading suppliers of real estate information in the industry. This frame was subsampled 

twice and clustered by leasing agent, who was the initial contact. Each cluster member is an 

individual building. The number of items assigned to the sample unit equaled the number of 

buildings. 

For retail buildings, the frame source was the 2001 edition of the Shopping Center Directory. 

This frame was also subsampled twice and clustered by leasing agent. Each cluster member is 

 25 
an individual retail shopping center. The number of items assigned to the sample unit equals 

the number of shopping centers 

Theaters, auditoriums, piers, and docks 

For theaters and auditoriums and piers and docks, buildings or structures were sampled. If the 

sample unit has only one building and that building has a different owner or leasing agent then, 

the building can be collected from the new owner or agent 

The frame source for theatres and auditoriums was the QCEW. For piers and docks, the frame 

source was a dataset provided by the American Association of Port Authorities. This frame was 

not clustered and each port authority was given an individual chance of selection. 

3.2.2 Offices of Real Estate Agents and Brokers 

3.2.2.1 Output Measurement 

Output definition 

The primary output for real estate agents and brokers is the service of aiding a customer in the 

sale, purchase, or lease/rental of a property. 

Pricing methodologies 

The price collected is the dollar value of the commission computed as a percentage of the total 

selling price or total lease value of a residential or commercial property. The commission is 

specified in the listing agreement or in some other contract with the principal. It is also possible 

for the broker to receive a commission stated in terms of dollar(s) per square foot. 

Initially, the sampled companies provide an actual sale price or lease value of a property 

recently sold or leased and the commission value. In subsequent months, using their expert 

knowledge of the current property market, these companies estimate what the price would be if 

the property was sold or leased in that current month. 

If a broker is unable to estimate the value of the property, it is acceptable to report the 

commission for a comparable property sold during the current pricing period. This is not a 

substitution; it is just another method for estimating the price. 

A flat fee will be collected for a discount broker. This is typically a list price. 

3.2.2.2 Service/Pricing Characteristics 

The service to be priced is the sale or leasing of a property. Since the value of the property 

along with the commission rate determines the commission received by a broker, it is important 

to capture the price determining characteristics of the property. These characteristics include: 

 26 
Residential property 

• Type of dwelling – single family detached house, townhouse, apartment, etc. 

• Property description – number of rooms, amenities, etc. 

• Lot size 

• Age of dwelling 

• Utilities available – water, sewage disposal, etc. 

• Garage 

• Location –urban vs. suburban, proximity to schools and public transportation 

• Improvements –new additions, significant repairs 

Commercial property 

• Square footage 

• Type of building – office, retail, etc. 

• Number of floors 

• Location – central business district, etc. 

• Location within building 

• Amenities –health facilities, cafeteria, etc. 

• Appurtenances – Rights to common areas, driveway easements, etc. 

Land 

• Size of lot 

• Location –urban vs. rural areas 

• Zoning – commercial vs. residential 

• Development of lot – raw vs. finished 

• Environmental features – lakes, timber, etc. 

Farms 

• Land use – crops, cattle, poultry, etc. 

• Soil type 

• Specialized facilities – dairy equipment, etc

Constant quality measurement issues 

A primary concern in pricing brokerage is that the same property is not sold every month. 

Therefore, companies are asked to estimate the current property value given the current real 

estate market conditions. Real estate agents and brokers are considered the industry experts 

for providing current estimates of property value; therefore, a secondary source is not used. 

Hedonic modeling is not possible due to the subjectivity of many of the pricing variables. 

3.2.2.3 Sample Unit Identification and Frame and Sampling Issues 

Many real estate companies tend to be national or regional with franchise or branch offices 

located around the country or region. Since pricing is tied to the local real estate market, each 

office was given a separate chance of selection as opposed to sampling the headquarters for all 

locations of a particular company. 

The QCEW and a database provided by the Axciom Corporation were combined to form a 

frame for this industry. The sample was drawn by using Wage figures as a size measure for the 

 27 
UI-based LDB strata, and by using estimated Revenue figures as a size measure for the Axciom 

strata. 

3.2.3 Passenger Car Rental 

3.2.3.1 Output Measurement 

Output definition 

The primary output for the passenger car rental industry is the provision of various types of 

passenger cars, without drivers, on demand, for a short period of time, i.e. less than one year. 

The rental equipment is made available for use by individuals, corporations and the government 

for leisure, business and car replacement (insurance) purposes. The passenger cars are 

typically contracted for use on an hourly, daily, weekend, weekly and monthly basis. 

Pricing methodologies 

The type of price collected is the rental rate based on the duration of the car rental. Time based 

units of measure are expressed as per hour, per day, per weekend, per week and per month 

depending on the car rental company. 

3.2.3.2 Service/Pricing Characteristics 

The transaction that is priced is a single rental. Car rental agencies tend to design unique rate 

structures that are targeted at specific market segments. The following transaction 

characteristics are captured and held constant: 

• Type of rate plan (e.g. standard, Internet, government, military) 

• Duration of rental period (e.g. day, week) 

• Class of rental vehicle (e.g. economy, compact, full size) 

• Model of rental vehicle (includes model year, model, passenger count) 

• Type of car rental Rate (e.g. hourly, daily, weekend) 

• Type of car rental (e.g. local, one-way) 

• Mileage terms (e.g. unlimited, flat fee per mile) 

• Type of fuel plan (e.g. flat rate fuel charge, fuel purchase option) 

• Additional/optional charges (e.g. additional driver, underage driver, late charge) 

It is important to note that these pricing variables may not be exhaustive and/or universally 

applied. 

Constant quality measurement issues 

The characteristics of the rental transaction are held fixed allowing constant quality to be 

maintained over time. 

3.2.3.3 Sample Unit Identification and Frame and Sampling Issues 

The sample unit is either the headquarters of a national car rental company, a franchise, or 

independent rental company. The frame was the QCEW, which was stratified by type of 

 28 
company. Identifying the national companies was not problematic. However, it was somewhat 

difficult to isolate the actual number of franchises. 

3.3 Health Services 

3.3.1 Hospitals 

3.3.1.1 Output Measurement 

Output definition 

The measurable output of the hospital industry is the total service package that a patient 

receives during their entire length of stay (i.e. admission to discharge). For an inpatient, these 

services may include room, board, medical supplies, drug treatments, medical & surgical 

procedures, and/or ancillary services. As for an outpatient, there would not be an actual 

admission to the hospital (i.e. length of stay is zero), therefore, the services an outpatient would 

receive would occur on a single visit to the hospital. Outpatient services may include treatments 

for minor injuries, minor surgical procedures, and/or ancillary services. 

Hospital services are not consumed in a piecemeal fashion. Each piece is part of the total 

service bundle. Thus, our unit of measure is the entire length of stay. The hospital's output will 

be represented by the entire content of a patient's bill. Any items and/or services that are 

included on the patient bill are treated as part of the output and will be included in our repricing 

effort. 

Pricing methodologies 

The PPI program is interested in what a hospital actually receives (reimbursement) for their 

services not what they charge (price). The PPI's primary purpose is to capture reimbursement 

as the net transaction price. For the hospital industry, the PPI uses the word 'price' 

synonymously with the term reimbursement. The terms will be used interchangeably throughout 

this document. It should be understood that when the term “price” is used, what is actually 

being referred to is reimbursement. 

The major types of reimbursement for hospitals are Diagnosis Related Group (DRG) case rates, 

per diem rates, and total billed charges (or a percentage of TBC). Capitation is currently not 

very prevalent among hospital reimbursement. We will collect a per member per month rate as 

well as the copayment amount and the number of visits per month (to measure utilization) for 

these contracts. In these cases, we will be repricing a population rather than a single patient 

treatment. 

The simplest reimbursement method for a hospital is total billed charges. But it is also the least 

common. Most of the time, a percentage discount on total billed charges is paid. This 

percentage is negotiated between the hospital and the insurance provider before services are 

rendered and is often in effect for a year or more for a given covered population. In markets 

with heavy managed care penetration this form of reimbursement is not as likely. 

Per diem rates are used frequently and are very easy to reprice. This type of reimbursement 

involves a per day payment for each day of stay in the hospital, regardless of actual charges or 

costs incurred. This per day rate depends on a number of factors. The two main factors are 

 29 
number and mix of cases. Many times, multiple sets of per diem rates will be negotiated based 

on service type (e.g. medical-surgical, obstetrics, intensive care, neonatal intensive care, 

rehabilitation, etc.). 

Originally DRG based reimbursement was for Medicare. It has since spread to the private 

sector. Today, DRG rates are widely used. There are publications of DRG categories, criteria, 

outliers, and trim points (i.e. the cost or length of stay that causes the DRG payment to be 

supplemented or supplanted by another payment mechanism) to enable the plan to negotiate a 

payment mechanism with the hospital for DRGs based on Medicare rates or in some cases, 

state regulated rates. Ultimately, the hospital and the insurance plan negotiate a rate (based on 

whatever criteria they choose) for each DRG they perform in that hospital. 

Straight charges are the only exception to the reimbursement methodology. Basically, this is 

hospitals' list price for the service package provided. However, the actual amount that appears 

on a patient bill is rarely what a hospital will receive as payment. In some cases, a hospital will 

receive the list price as its reimbursement. In these instances, this is what we will collect as our 

net transaction price. 

3.3.1.2 Service/Pricing Characteristics 

The major price-determining characteristics for hospitals include: 

• Diagnosis Related Group, or DRG (inpatients only) 

• Principal diagnosis 

• Principal procedure 

• Type of payer 

• Length of stay, or LOS (inpatients only) 

These characteristics are the main components of the total service package that a patient 

receives during their entire length of stay (i.e. admission to discharge). The two most important 

are the DRG and the type of payer. The DRG is the basis for repricing in general medical and 

surgical hospitals, whereas the principal diagnosis is used for psychiatric hospitals and most 

specialty hospitals. The type of payer, depending on whether it is Medicare, Medicaid, private 

third party, or self-pay, dictates the payment arrangement (type of reimbursement). 

Initially, for general hospitals and children's hospitals, random sets of DRGs are pre-selected for 

collection at each individual hospital. These DRGs are listed on an item assignment sheet 

(IAS). This lists the unique combination of DRGs to be collected at each hospital. The IAS will 

also list several alternative DRGs that can be used if one of the targeted DRGs is not available 

at a particular hospital. Within each DRG, there are ICD-9-CM codes that pertain to diagnoses 

and procedures; this is where the principal diagnosis and principal procedure fall. The principal 

diagnosis refers to the condition that is chiefly responsible for causing the admission of the 

patient to the hospital for care. The principal procedure is the procedure that was performed for 

definitive treatment rather than one performed for diagnostic or exploratory purposes or was 

necessary to take care of a complication. 

Constant quality measurement issues 

A concern in pricing hospitals is the change in treatments over time. Improvements in medical 

technology, new procedures, or new drugs can impact treatments in terms of the length of 

hospital stay, the types or amount of drugs administered, or treatment outcome. It is difficult to 

 30 
determine when such a change is a change in quality or a pure price change. A price change 

associated with a change in treatment that results in the same outcome would be treated as a 

pure price change. However, if a new treatment is developed with substantial differences in 

outcome, a quality adjustment may be warranted. An example is replacing a surgical treatment 

with a drug treatment that produces a different outcome. 

Currently, the PPI is researching potential quality adjustment methods similar to those described 

below for nursing care facilities. 

3.3.1.3 Sample Unit Identification and Frame and Sampling Issues 

The types of hospitals sampled include general medical and surgical, psychiatric, and specialty 

hospitals. The sample unit is a single hospital, not a hospital system. Hospitals within a system 

were given separate chances of selection. 

The source for the frame for hospitals was the American Hospital Association. The data is from 

the 1998 release of the Healthcare QuickDisc database, which uses data from the 1997 Annual 

Survey of Hospitals. 

According to the industry definition, all federal hospitals should be included in these industries. 

However, since no measurable economic transaction occurs in these hospitals, all federal 

hospitals have been excluded from the frame. Hospital units of institutions have also been 

excluded from the frame because they are part of other industries. 

Revenue was not available at the hospital level, so admissions were chosen as the measure of 

size for all three industries. It is believed that total facility expenses are a good proxy for 

revenue, as a majority of hospitals are non-profit. However, the response rate for this variable 

was only 78 percent. Since total facility expense is highly correlated with admissions, and the 

response rate for admissions was 86 percent, it was chosen as the measure of size. Because a 

value for total beds was available for each record, the missing admission values were estimated 

using average admissions per bed and number of beds. 

3.3.2 Nursing Care Facilities 

3.3.2.1 Output Measurement 

Output definition 

The primary output for establishments in this industry is defined as all care and services that are 

provided to the resident by the nursing home. Care is usually classified in three general levels, 

from minimal nursing care (perhaps just administration of medication) to more intense nursing 

services, such as round-the-clock monitoring. Medical care typically consists of nursing care; 

physical, speech or occupational therapy; drugs; blood; medical supplies such as splints or 

casts; and the use of durable medical equipment. Other incidental medical services would 

include dental, social, dietary, or psychiatric services. Also included in the output would be the 

cost of meals, and other "convenience items" such as use of the telephone, laundry services, 

newspaper, or television. 

Nursing homes may also provide social services such as social work services, recreational 

activities, beautician or barber services, and chapel services. Nursing homes may contract out 

 31 
for physical therapy, occupational therapy, oxygen supply, beautician services, etc. Any 

services provided by and reimbursed to specialists on contract with the facility are not to be 

included in primary services. Most nursing homes have contracts with outside pharmacies to 

supply medications. However, if the establishment does operate a pharmacy, the pharmacy 

activity is not included as output. 

Nursing homes typically bill for services on a per diem or daily rate basis. Depending on the 

facility, different items are included in the per diem charge. For example, some facilities may 

include the price of a private television in the per diem rate, while others may bill for it 

separately. The items that may be billed separately can range from specialized nursing care 

(such as hand feeding), to basic care like a visit by the beautician. A private room may have a 

different per diem rate than a semi-private room. 24-hour on-call service from a physician may 

elicit an additional fee or may be included in the per diem rate. However, if the resident's 

physician conducts an examination or other medical service at the nursing home, the physician 

will bill for this service on his/her own. This would represent revenue for this industry. 

Pricing methodologies 

The type of price in a nursing home will be collected on the bill. That bill may be for the entire 

episode within the nursing home, or an interim bill of monthly services (for those patients 

needing continuing care). In either case, the bill will contain their daily rate applied to their 

number of days in the facility, and additional charges not included in the daily rate. The daily 

rate is called the per diem rate. While this is the industry standard, items and services included 

in the per diem rate can vary by facility and payer type. 

Medicare, Medicaid, and private insurance reimburse using the per diem structure. However, it 

is possible that the rate charged to out-of-pocket payers could be a measure other than daily 

(for example: an hourly rate). In addition, the facility may have a billing period that is weekly 

rather than monthly. The price that represents the entire stay or the interim billing period, 

whichever is shorter, is collected to measure the output of this industry. In the case that an 

interim billing period is a week, the per diem rate times the number of days in the facility and 

any additional line item charges for that week would be collected. As with all rates, the services 

and items that are included in the rate, as well as services and items that are not included, must 

be provided. 

When information is collected at the corporate setting, patient bills may not be accessible, and 

collection may be limited to only the per diem rate. Other acceptable prices include an hourly or 

monthly rate, total billed charges, or an estimated net price. Current average prices are not 

acceptable because they cannot represent one unique patient and treatment path. 

3.3.2.2 Service/Pricing Characteristics 

The nursing home industry has its service lines best defined by the payer of services. The two 

major types of payers are public payers and private payers. 

Public payers can be separated into two main categories, Medicare and Medicaid. Medicare is 

a federally funded program for persons over age 65. It pays for short stay visits in a nursing 

home where the patient receives rehabilitation and expects full recovery and discharge. 

Medicare does not pay for nursing home residents who do not expect discharge from the facility. 

Medicaid is a State administered, jointly funded (Federal and State) program for the indigent. 

Medicaid is designed to pay for the care of long-term patients (those not expected to recover 

 32 
enough to leave the facility) that have exhausted their personal income. There are other public 

payers that represent a small portion of the industry. 

Private payers can be separated into two main categories, private insurance and out-of-pocket. 

When the patient has private insurance, or long-term-care (LTC) insurance, it pays a portion of 

their nursing home expenses. This type of insurance is becoming more common, since health 

care costs have risen. Out-of-pocket payers, as the name describes, are the patients or families 

of the patients making direct payment for the care. Philanthropic or charitable payers are other 

types of private payers, but represent very small portions of the industry. 

Constant quality measurement issues 

The PPI Program currently adjusts items in the nursing care facilities industry based on one of 

the quality indicators published by the Department of Health and Human Services for that 

industry. The quality indicator measures changes in nurse staffing levels for each nursing 

home. A positive correlation between nurse staffing levels and the quality of services provided 

by nursing homes was demonstrated before any steps were taken to quality adjust the nursing 

care facilities index . While nurse staffing is only one of many complex factors that impact the 

quality of nursing care facilities services, analyses by the Institute of Medicine (IOM), the 

Centers for Medicare and Medicaid Services (CMS), and the General Accounting Office (GAO) 

point to nurse staffing as a key factor in determining the quality of nursing care facilities care. A 

dollar value can be assigned to changes in nurse staffing levels using BLS wage data. 

3.3.2.3 Sample Unit Identification and Frame and Sampling Issues 

An individual nursing care facility is the sample unit for this industry. The QCEW was used as 

the sampling frame. 

3.3.3 Offices of Physicians 

3.3.3.1 Output Measurement 

Output definition 

The output of this industry is the medical services and treatments provided by a physician. 

When the buyer is purchasing the services one at a time, the buyer reimburses the provider on 

a fee-for-service basis. The output of this industry, in a fee-for-service setting, begins when a 

patient enters the establishment, and ends once medical services are provided. If a buyer prepurchases care for a group of persons the type of payment is called capitation. The output of 

this industry, on a capitated basis, begins when a person chooses to be a member of a 

physicians population, and continues until the person is no longer a member, and is no longer 

the treatment responsibility of the physician. 

Pricing methodologies 

There are currently three different types of reimbursement for providers (i.e. prices). They are 

total billed charges (i.e. fee-for-service), discounted fee-for-service, and the capitated rate. 

Discounted fee-for-service arrangements can be presented as the contracted reimbursement or 

the expected reimbursement (anticipating a later payment). Fee-for-service, as the name 

suggests, is a reimbursement for the charges of services that have already been rendered. This 

 33 
method of reimbursement is associated with indemnity insurance including Blue Cross/Blue 

Shield. Discounted fee-for-service falls under the same definition with a contracted reduction of 

the original charges. This type of discount is either a percentage reduction of the charges or a 

negotiated fee. These types of contracted arrangements are usually associated with Medicare 

Fee Schedule payments or Managed Care Organizations. When the reimbursement to the 

physician does not involve any type of third party payer, total billed charges will be the type of 

price with self-pay being the type of payer. Finally, capitation is the prepayment, by the 

Managed Care Organization (typically an HMO), for the average monthly services of a group of 

plan members (population). Capitation is the pre-purchase of a month’s worth of health provider 

services. 

A net transaction price will be the preferred price to collect for all methods of reimbursement 

except capitation. That is, the actual billed price on the patient's bill less any discounts offered 

to that patient. A net transaction price for this industry may be a combination of many fees 

incurred during a patient's visit. Most often, a payer will have negotiated a fee schedule (which 

would qualify as a negotiated contract price) with the physician or the clinic and the fee on that 

schedule for the service provided will be level of reimbursement or price for that service. If the 

physician has agreed to accept this fee as payment in full, then that is our net transaction price. 

In this case, some type of contract identifier will be used so that the same contract can be 

repriced over time. 

In the case of fee-for-service arrangements, the actual billed charges will be the net transaction 

price. The total billed charges listed on a patient's bill acts as the list price. This price is 

acceptable if the patient is responsible for payment (no other payers, discounts, or other fees 

apply, i.e. self-pay), or the insurance, which has no contractually negotiated discounts, pays its 

portion, with the remainder balance billed to the patient. In either way the total charges are not 

discounted. 

Global fees are also a type of price or reimbursement that may be encountered. These types of 

fees, generally surgical, include services from some time before the procedure itself is 

performed until some time afterward. 

Capitation, as a type of global fee, is a prepayment for services instead of a reimbursement. 

The price that will be collected for capitation will be the per member per month (PMPM) rate. 

This price will represent a unit of the total transaction (which can change due to the population 

size). In addition, the copayment per visit will be captured and factored into the price by 

multiplying it by the number of monthly visits at the time of collection divided by the member 

population. This equation for the copayment surcharge is shown below. 

Copayment surcharge = ofNumber members planin assoicatedwithpractice

Copayment monthlyofNumberxvisitper visits

Other elements that help to explain the price are the professional and technical components (i.e. 

especially in radiology and anatomic pathology procedures). The technical component is for the 

actual procedure that was done and the professional component is a fee charged by the 

physician. 

Outpatient care facilities especially, may provide prices that include both a professional fee for 

the actual treatment and a facility charge. Again, these should be added to produce the net 

transaction price. 

 34 
Average prices for physician services are not acceptable because an average could incorporate 

many different types of payers. Also, an average price in an industry where no two services are 

alike (because every patient is inherently different and, in most cases, services provided to 

those patients will never be exactly alike) would not be repriceable because the service bundle 

would change every time a price was reported.

3.3.3.2 Service/Pricing Characteristics 

Initially, a patient's bill for treatment is collected and items included in that bill are held constant 

over time. The amount of care may be a complete treatment, including more than one office 

visit, diagnosis, or procedure. In the case of a treatment whose price is a global fee, all 

procedures and treatments must be included in the fee (i.e. an initial office visit, a diagnosis, a 

surgical procedure, and a follow up visit could all be included in the fee). All of the services 

involved must be listed if a global fee is listed as the net transaction price. In addition, the 

treatment being collected does not necessarily have to be performed on the premises of the 

collected establishment. Some doctors perform surgery in places other than the establishment 

with which they are financially affiliated (e.g. hospital). Some may even visit a patient in a 

nursing home facility. Revenues generated in this manner will be included in the total revenue 

of the collected establishment. 

 

In the case of a fee-for-service arrangement, both the patient's bill (collection of all of the 

individual line items included on a patient's bill even if we cannot obtain a copy of the actual bill) 

for the treatment he or she received and any other fees that were incurred during the patient's 

treatment will be collected. One example of this type of fee would be a facility charge for the use 

of the facilities within an ambulatory care center. In order to accurately measure what was 

actually done to the patient, all procedure (Current Procedural Terminology 4th edition - CPT-4) 

and diagnosis (International Classification of Diseases 9th revision - ICD-9) codes that apply to 

the patient will also be collected. 

For capitation, the contract (which describes the expected utilization using specific procedure 

codes and population characteristics) will be collected as a single global fee. The capitated fee 

(plus any additional fees, copayments, which might go along with a particular treatment) will 

represent the revenue generated in offices and clinics of doctors of medicine. 

Constant quality measurement issues 

As stated previously stated, a patient's bill is collected and held constant over time. With all 

types of health services, there are inherent problems with this methodology. First, treatment is 

never the same between two patients with the same condition. However, the standardization of 

procedural terminology allows for consistency of billed services. Therefore, substitutions should 

only be necessary if new procedures replace current procedures to increase effectiveness. This 

type of adjustment is not likely. 

Substitutions are more likely to occur when a particular insurance or health plan is no longer 

accepted by the provider. This requires a link to show no change to account for differences in 

the prices of the different health plans. However, during such substitutions it is recommended 

to substitute using a health plan with the same method of reimbursement. Otherwise method of 

reimbursement should remain constant. 

Changes across payer type should not be common. In fact, they should only occur when a 

contract is completely terminated. For instance, a physician may decide to stop accepting 

 35 
Medicaid patients so an attempt would be made to collect the same treatment with a different 

type of payer. 

According to the Health Insurance Association of America (HIAA), payer contract changes occur 

approximately once a year. These changes are most often the result of private insurance 

companies' annual renegotiations. In addition, Medicare updates its fee schedule every 

January. 

Although the specialty of the physician is a price determining characteristic, the specialty of the 

physician is unlikely to change. Physicians rarely change specialties and they also rarely 

change geographic location. Because of this, these two price determining characteristics 

should not be the cause of service substitution or quality adjustment. In fact, the Medicare Fee 

Schedule includes no differences in the fee schedule across most specialties. 

The health outcomes of physician's patients will not be assessed. For the BLS, "quality" will 

refer only to the (producer) cost of providing the selected service bundle to the patient. 

Differences in quality and competence among physicians are extremely difficult (if not 

impossible) to measure accurately, so these measures will also not be included in the index 

computation. 

3.3.3.3 Sample Unit Identification and Frame and Sampling Issues 

The sample unit is a solo or group practice. 

The AMA Physician’s Masterfile and the Group Practice File were combined as the sample 

frame. These files were chosen because they are more complete than the QCEW, and they 

include number of physicians, which is a better proxy for revenue than is total employment. In 

addition, each record identifies the primary specialty of the solo physician practice or group 

practice. 

The Masterfile, consisting of solo practices, was explicitly stratified into the eight single specialty 

categories. In addition, a stratum was formed to include physician records for which a primary 

specialty was not identified. 

The Group Practice File was explicitly stratified into seven single specialty and one 

multispecialty categories. Doctors of Osteopathy were not available in the Group Practice File. 

As with the Masterfile, an additional stratum was created for group practice records with no 

primary single specialty indicated. In addition, a stratum was formed for records for which the 

specialty composition was not indicated (i.e., single or multispecialty). 

3.4 Retail and Wholesale Trade 

3.4.1 Retail Trade 

3.4.1.1 Output Measurement 

Output definition 

The primary output of retail trade industries is the provision of the marketing functions 

necessary to allow consumers access to purchase various goods. In contrast to wholesale trade 

 36 
industries, customers are able to make unit purchases of items (i.e. not required to buy in bulk), 

that are generally packaged in some manner. Basic functions involved in the marketing process 

include standardization or grading, storage and transportation, buying, risk bearing, financing, 

selling and product planning. The selling function is probably the most obvious one seen by the 

consumer. Selling includes the pricing of the product and the presentation. Presentation 

includes activities such as tagging, packaging, display, space allocation, advertising, and 

promotion. 

Retail establishments are classified into a specific industry by kind of business according to the 

principal lines of commodities sold (groceries, hardware, etc.), or the usual trade designation 

(drug store, cigar store, etc.). Once the industry classification is determined for an 

establishment, the sale of any margin product (goods bought by the retail store and resold to a 

household consumer) is considered primary production to the establishment. This is because 

industry classification is determined by type of store and the exact same product can be found 

in establishments classified in a number of retail industries. This is an exception to the general 

rule of classification of products found in the PPI. However, since what is being measured in 

retail trade industries is the service in delivering these goods to the public, this procedure is 

appropriate. A retail store may also sell goods to businesses, but as long as an establishment 

markets itself to the general public, it is classified in retail trade. This guideline holds even if the 

majority of the establishment’s sales receipts are from wholesale transactions. It is generally 

recognized that if a store considers itself a retail establishment, then the retail activity carries 

over to intermediate users as well as final consumers. In addition, services incidental to the 

sale of goods (e.g. delivery of groceries) are considered primary production of the 

establishment. 

Pricing methodologies 

The type of price collected in retail trade industries is a margin price (with the exception noted 

below). The margin price is calculated by taking the selling price and subtracting the purchase 

price of the last shipment received (less all rebates and allowances) for a specific good. 

National income accounting conventions also define the output of retail trade as the margin. 

The Bureau of Economic Analysis defines this as the selling price of a good in the retail market 

less the cost of replacing the good in the store's stock. This definition is difficult to 

operationalize because it requires collecting the replacement cost of the item. It is far easier to 

use a Last In First Out (LIFO) accounting methodology, that is, using the last shipment received 

for pricing the acquisition cost of the sold item. 

Two approaches have been used in the margin pricing methodology. The preferred approach is 

to collect the average margin value of a relatively homogeneous grouping of products. In this 

case, while store characteristics may better explain changes in margin, the concern with this 

approach is that the grouping may be affected by product mix. The other approach is to collect 

the margin price of a unique product. This "sample of goods" approach is used to represent the 

output of the entire store. One concern with this approach is that the marketing of the selected 

sample of goods may not always be representative of the marketing of other goods sold in the 

store. Using this approach, changes in store characteristics may not explain changes in margin 

for the selected sample of products 

An exception to the margin price methodology occurs in some limited cases. Certain 

transactions are priced using the total retail sale price of the good sold. This is mostly due to 

the large value added to the product in preparation for sale or a fee for a service where the 

customer is clearly paying for something incidental to the sale of goods. Examples include 

 37 
sales from in-store restaurants run by the retail establishment, alterations of purchased goods, 

and delivery charges incidental to the purchase of a good. 

3.4.1.2 Service/Pricing Characteristics 

 

There are a variety of price determining components that are applicable in the retail trade 

industries. They include the type of product, size/weight, and often, material composition. In 

addition store characteristics associated with providing the service are also collected or 

assigned to sample units based on secondary source data. These can include characteristics 

such as the store area, number of available choices of products, the existence of scanners for 

processing customers and age of scanner software, and the hours of operation. 

Constant quality measurement issues 

A fundamental issue in pricing retail trade industries is quality adjusting changes in store 

characteristics. If store characteristics change, all items being priced from that location have to 

be adjusted to account for changes in the service provided that are related to a change in store 

characteristics. Hedonic models should be able to quantify the correlation that exists between 

store margins and store characteristics. 

Store characteristics collected by BLS include: 

• Total store area 

• Selling area 

• Checkout scanners 

• Age of scanner software 

• Number of stock keeping units 

• Number of full-time-equivalent employees 

• Type and location of store 

• Hours of operation 

• Total sales volume 

• Time since last renovation 

Although the above characteristics are often readily available from sample units, a 

transformation of data elements may increase the precision of measure in hedonic models. An 

example is a ratio of checkouts to store traffic (more checkouts per customer indicate better or 

faster service all else equal). 

Other ratios to include: 

• Checkouts/sales 

• Employees/sales 

• Stock keeping units/store area 

• Employees/store area 

• Checkouts/store area 

A retail store is considered to be providing the same service activity when slight modifications 

are made to the product. 

 38 
3.4.1.3 Sample Unit Identification and Frame and Sampling Issues 

First stage sampling (sample unit selection) is based on sales data which is most often available 

for large retail trade industries or when sales data are not available, on employment size which 

is most often the case for small industries. Both measures are used as a proxy for margin 

revenue in a probability-proportionate-to size sample. The sample unit is the headquarters 

location. 

Second stage sampling (item selection) is based on margin dollars. 

3.4.2 Wholesale Trade 

3.4.2.1 Output Measurement 

Output definition 

Wholesale output can be defined as the efficient transfer of goods from the manufacturer to 

another party for the strict intention of resale. Sample units that produce this output have two 

primary functions including 1/ the creation of utility (or efficiency) and 2/ a channeling function. 

The utility function mentioned above has several parts to it including the creation of time and 

place utility and making products available when and where customers are likely to find them. 

Wholesalers also create possession utility, allowing their customers to take ownership of 

products as needed. Finally, wholesalers also provide information utility, providing details about 

the products that they sell. 

The above definition also includes a channeling component, which is not as easy to describe. 

The channeling function has many parts to it whereby the wholesaler performs one or more of 

the following functions: 

• Selling and promoting - wholesalers’ sales force help manufacturers reach small customers 

at a low cost. In this channeling function, the wholesaler has more contacts and is more 

often trusted by the buyer than the distant manufacturer. 

• Buying and assortment building - wholesalers can select items and build assortments 

needed by their customers, thereby providing a “one stop shop” for a buyer. 

• Bulk breaking - wholesalers save their customers money by buying in carloads and breaking 

these large lots into smaller quantities. 

• Warehousing - wholesalers hold inventory, thereby reducing the inventory costs and risks of 

suppliers and customers. 

• Transportation - wholesalers typically provide quicker delivery to buyers because they are 

closer to the buyers than the manufacturer. 

• Risk bearing - wholesalers absorb risk by taking title and bearing the cost of theft, damage, 

spoilage, and obsolescence. 

• Market Information - wholesalers give information to suppliers and customers about 

competition, new products, and price developments. 

 39 
• Management services and advice - wholesalers often help customers train their sales clerks, 

improve store layouts, and displays, and set up accounting and inventory control systems. 

Wholesalers also may perform installation services, equipment repair work, as well as warranty 

repair work for the manufacturer. All of these services are not considered to be part of this 

industry, are generally not bundled with the wholesaling function and if selected during 

disaggregation, should be collected as an other receipt. 

Pricing methodologies 

Margin prices are the most prevalent type of price for merchant wholesalers. Dollar value of 

commission based on a percent of sales is the most prevalent type of price for agents and 

brokers and for manufacturers’ sales and branch offices that do not take title to a good. 

Margin prices (merchant wholesalers)

The type of price collected in goods merchant wholesale is typically an unlagged average 

margin price. Margin is a combination of two different parts; one is the incoming acquisition 

price from the manufacturer and the other is the selling price to the next level buyer; the 

difference between these two prices is called the gross margin. The first part of the price, the 

acquisition price, represents how much the wholesaler paid for an item from the supplier. This 

acquisition price represents the direct cost of the wholesaled goods and should exclude freight 

whenever possible (freight should be FOB or if delivered based on a minimum). The price 

should include point-of-sale incentives (taken as discounts) that may be applied to the 

merchandise whenever possible. 

There are five different margin prices in this industry. They are prioritized below. 

1. Average gross margin per unit for a comparable customer class and/or supplier class for all 

sales within a comparable product line. 

2. Average gross margin per unit for all customers and/or suppliers for a comparable product 

line. 

3. Average gross margin per unit for a particular customer class and/or supplier class for all 

sales of a particular product. 

4. Average gross margin per unit for all customers and/or suppliers for all sales of a particular 

product. 

5. Gross margin for a single specific product transaction. 

Agents and brokers and manufacturers’ sales or branch offices that take title to a good can also 

have margin price transactions. 

Dollar value of commission prices (manufacturers’ sales and branch offices)

Agents and brokers and manufacturer’s sales and branch offices typically receive a commission 

fee for their service. The commission is the amount of money that the sales office receives (not 

an individual agent) for performing the service. Five percent of the per unit sales prices is a 

 40 
typical sales office commission percentage, although this can vary. Since revenue figures are 

typically recorded in terms of sales dollars for this industry, the total dollar value of commissions 

is a result of multiplying total sales dollars by the average commission percentage. 

There are also five different types of dollar value of commission prices prioritized below. 

1. Average dollar value of commission per unit for a comparable customer class for all sales 

within a comparable product line. 

2. Average dollar value of commission per unit for all customers for a comparable product line. 

3. Average dollar value of commission per unit for a particular customer class for all sales of a 

particular product. 

4. Average dollar value of commission per unit for all customers for all sales of a particular 

product. 

5. Dollar value of commission for a single specific product transaction. 

Merchant wholesalers, agents and brokers, and manufacturers’ sales and branch offices do not 

typically price their services based on a flat fee commission price. However, in the event that 

they do, a flat fee for a single specific transaction is collected. 

3.4.2.2 Service/Pricing Characteristics 

There are a variety of price-determining components that are applicable in all of the wholesale 

trade industries and they include: 

• Product Information - The type of product purchased is one of the largest price determining 

components. Products differ by cost, size, color, as well as many other category 

differences. Products also differ by demand, which can be a large price determining 

component when similar products are sold. Products also might differ by the amount of 

additional services that are added to the product while on the premises of the wholesaler. 

They are generally considered incidental to the wholesaling operation and do not change 

the function of the product. 

• Buyer Sales Information/ Supply Source Incentive Information -This price-determining 

component is also important on both ends of a wholesaler’s transactions because price 

breaks from supplier to wholesaler and from wholesaler to the next level buyer are 

frequently based on volume. Consequently it is important to identify the sales volume where 

these price breaks occur. 

Constant quality measurement issues 

By pricing average margins, constant quality is maintained and no further adjustments are 

necessary. 

 41 
3.4.2.3 Sample Unit Identification and Frame and Sampling Issues 

The QCEW was used to sample these industries. For first-stage sampling, the three-digit 

NAICS level was used due to problems with the NAICS treatment of wholesale trade. Secondstage sampling was based on margin dollars. 

3.5 Information and Communication 

3.5.1 Newspaper and Periodical Publishing 

3.5.1.1 Output Measurement 

Output definition 

The output of the newspaper publishing is the publication of intellectual content in the form of a 

newspaper. A newspaper is a regularly issued publication printed on newsprint and containing 

news, commentary, feature articles, photographs, and/or advertising of interest to the general 

public 

The primary output of the periodical publishers is intellectual content delivered in set intervals at 

least once a year. The most common formats for periodicals are magazines, newsletters, 

abstracts, and journals, either in hard copy form or online. 

Pricing methodologies 

The output of both industries can be measured in two ways; through the direct sale of the 

publication through subscriptions and single copy sales, and indirectly through the sale of space 

in the periodical to advertisers who want to reach the audience of readers. 

Subscriptions 

The preferred price for subscriptions is an average price. The item selected should reflect a 

specific duration of subscription (such as 52 week, 26 week, 13 week) and frequency of delivery 

(daily, weekly, etc.). The revenue for all newly transacted subscriptions of the selected duration 

and frequency will be divided by the number of these units delivered. This number of units 

delivered is not necessarily the same as the number of subscriptions sold because it can 

include free and/or promotional copies. 

If it is not possible to get an average as stated above, it is acceptable to collect an average 

percent discount if this figure is tracked by the respondent. The average discount is calculated 

by comparing the actual revenue received for subscription transactions to the revenue that 

would have been received if every subscription was sold at list price. If this is selected, the 

average discount will be applied to the list price for the subscription chosen and the price will 

still be noted as an average price. 

If average prices cannot be provided at all, it is acceptable to collect an actual transaction price 

for a single subscription. 

 42 
Single copy sales 

An estimated transaction price is the only price for a single-copy sale. Each single-copy sale 

transaction represents a unique deal with a specific wholesaler or distributor. One such 

transaction should be selected. In the ensuing months, the features of the contract should 

remain fixed, and the respondent should estimate the price that would be received if a similar 

deal were to be transacted in the current month. 

Advertising 

The preferred price for virtually all advertising is an average price. This average price should 

always refer to the ads of a specific type and size that appeared in the publication during the 

pricing period. Depending on the respondent’s preference, the pricing period may be the most 

recent week or another defined period. Advertising average prices may be collected with an 

average discount, or by dividing the revenue collected from the sale of all ads of the specified 

type and size by the number of these ads that were published during the defined time period. 

The average discount is calculated by comparing the actual revenue received for sales of 

advertisements of the selected type and size to the revenue that would have been received if 

each of these advertisements were sold at the listed rate card price. The average discount 

should be applied to the rate card price to get the final price to be tracked. 

Lagged average prices are not acceptable. The collected average should refer to ads published 

during the pricing month. If average prices cannot be provided at all, it is acceptable to collect 

an actual transaction price. 

For newspapers insert ads, the preferred price is an actual transaction price. 

3.5.1.2 Service/Pricing Characteristics 

The two primary services to be priced are circulation and advertising. 

Circulation 

Circulation can be classified into two categories, subscriptions and single-copy sales. 

Subscription prices depend on the frequency of delivery (e.g. daily, daily and Sunday, monthly, 

quarterly) and the duration of the subscription (13 weeks, 26 weeks, 52 weeks). 

For periodicals, the term ‘single-copy sales’ is misleading because virtually all publisher 

revenues in this area do not derive from sales of single issues. For publishers, this service area 

refers instead to the publishers’ sale of bulk amount of periodicals to wholesalers and 

distributors who resell these items to retailers (primarily newsstands, bookstores, and grocery 

stores). In some cases, a publisher may bypass these middlemen and sell their products 

directly to the retailers, but this is fairly uncommon. 

Advertising 

Newspaper advertisements account can be classified into four categories: 

• Display ads – These ads are generally purchased by companies rather than individuals. 

Their price is determined based on the amount of space in column inches, the type of 

 43 
graphics, and the number of colors used. 

• Classified ads - These ads appear in smaller typeface and are frequently called the “want 

ads”. These ads are purchased by companies and individuals. Color is generally not an 

option when printing classified ads, so the size of the ad is the main price determining 

characteristic. The sizes of these ads are measured in terms of their line count. 

• Insert ads - These ads are printed apart from the regular press run and then inserted among 

the regular newspaper sections. They are purchased mostly by national chain stores and 

the price is determined by the number of pages, the quality of the paper, the quality of the 

graphics, and the number of colors used in printing. 

• Internet ads - These ads appear in the online version of the newspaper only. They are 

generally purchased by companies rather than individuals. Their price is determined based 

on the height and width of the ad (typically measured in pixels), the type of graphics/fonts, 

display time, and the position of the ad on the screen (i.e. top banner, side banner, etc.). 

Constant quality measurement issues 

Quality adjustment may be needed for subscription transactions when the frequency of delivery 

changes. Quality adjustment may also be necessary for advertising transactions when there is 

a large change in publication frequency or circulation. 

3.5.1.3 Sample Unit Identification and Frame and Sampling Issues 

Newspaper Publishers 

Newspaper publishers take several different forms. These establishments may be small local 

newspapers, regional newspapers or national newspapers. In general, the headquarters of the 

newspaper is where the records are available. 

Periodical Publishers 

The sample unit for periodical publishers is an individual periodical title, and not the entirety of 

activities of the publisher. 

This sample was selected through a two-stage sampling process. In the first stage, publishing 

companies were selected from the QCEW. Wages were used as the size measure in this first 

stage. Each unit was assigned a number of magazine titles to be subsampled. The largest 

units were assigned multiple titles, but the majority of companies were assigned a single title 

only. These titles are the sample units and were selected from a secondary frame source, 

Mediafinder. 

 

We chose to sample by title because it would be very difficult to accurately represent all of the 

activities of an entire publishing company in one sample unit with a reasonable number of items. 

The two-stage process of selecting titles was chosen because the alternative frame proved to 

be unreliable in providing consistent, comparable circulation figures across companies.

 44 
3.5.2 Software Publishing 

3.5.2.1 Output Measurement 

Output definition 

The primary output of this industry is the provision of computer software and related services to 

ensure the successful use of the software. 

Software publishers sell software licenses which grant customers the right to use programs 

designed and developed by the software publisher. These programs are standardized software 

solutions; each customer purchasing the software receives a program providing the same 

features and functionality. This is in contrast to custom software in which unique programs are 

developed and designed to meet the individual needs of each client. Along with software 

licenses, software publishers also provide related services for their software products such as 

technical support, product updates, software maintenance programs, consulting, software 

implementation services, and training services. 

Software may be designed for use on personal computers (PCs), servers, cell phones, personal 

digital assistants (PDAs), game consoles, and a variety of other computing devices. 

Software falls into two main categories based on how it is transacted. Mass produced software 

marketed to the general public is referred to in this study as “packaged software”. Software that 

is designed for business and institutional clients is typically server based, and is referred to in 

this study as “enterprise software”. 

A software model gaining more attention in recent years is open source. Unlike traditional 

software licenses, open source software source code can be copied, altered, and redistributed 

free of charge. Open source software vendors typically distribute free software programs to 

their customers and earn revenues by providing support services, such as implementation or 

consulting, for their software. 

Software applications accessed over the Internet from servers not located at the clients’ site as 

well as those pre-installed on a hardware device are not primary to this industry. 

Pricing methodologies 

The method of collecting prices depends on whether the software is considered enterprise 

software or packaged software. 

Enterprise software 

Enterprise software licenses are typically sold to businesses, institutions, or value-added 

resellers and are not mass marketed to the general public. The enterprise software category 

also includes flat fee site licensing agreements. The preferred price is an average price 

calculated by dividing the total revenues earned from the sale of a particular software product 

sold to a particular client type (end user, retailer, wholesaler/distributor, or OEM) by the total 

number of these licenses sold to these clients within a specified period. 

 45 
Each month or quarter, many enterprise software publishers calculate an average percentage 

by which their final selling prices fall short of the list prices for each of their products. This 

calculation is known as the average discount off the list price. For enterprise software 

transactions, the average price will be calculated by applying this average discount to the list 

price of a selected transaction. 

The average discount should be calculated based on all transactions of the selected software 

product which occurred during a specified time period. However, if a firm cannot provide this, it 

is acceptable to collect an average discount that is based on all transactions for the type of 

software that matches the one that has been selected. For example, if a transaction of 

Database software product A is selected, an average discount based on all Database software 

product A transactions should be applied to the list price. However, if the respondent only 

maintains average discount data for all of their database product transactions together (and not 

one for product A transactions only) it is acceptable to apply this average discount to the list 

price of the selected transaction as well. 

Virtually all enterprise software transactions require the purchase of first year maintenance with 

the purchase of the software license. As a result, the collected transaction should consist of 

both the license prices (including all client and server licenses sold as part of the transaction) 

and the price of first year maintenance, even if the purchase of first year maintenance is 

optional. This is because virtually all enterprise software licenses are offered in conjunction with 

first year maintenance for one single negotiated fee. 

If an average price cannot be collected, it is acceptable to collect an estimated transaction price 

for enterprise software transactions. A typical, recent enterprise software transaction will be 

chosen, and each month during repricing the respondent will estimate the selling price for that 

particular transaction to a similar client. The collected transaction should consist of all client and 

server license prices and the price of first year maintenance. 

Packaged software 

Packaged software licenses consist of mass produced software marketed to the general public. 

Packaged software can be purchased at retail locations or through the Internet via online stores. 

Buyers of packaged software include households, computer hardware manufacturers (OEMs), 

retailers, and distributors or wholesalers. Packaged software transactions may involve the 

purchase of one license by a household buyer or may involve the purchase of hundreds of 

individually priced licenses by a retailer or distributor. 

The preferred price is an average price calculated by dividing the total revenues earned from 

the sale of a particular software product sold to a particular client type (end user, retailer, 

wholesaler/distributor, or OEM) by the total number of these licenses sold to these clients within 

a specified period. 

If an average price cannot be collected for packaged software, it is acceptable to collect an 

actual transaction price for the sale of an individual license to a particular client type as long as 

the software publisher does not negotiate separate prices for separate clients of the same type 

(i.e. all retailers are offered the same per unit price). If the software publisher offers volume 

discounting in which the price per license decreases as the quantity of licenses increases, the 

price reported each month should be the per license price for a specified quantity of licenses 

sold. If software publishers negotiate separate prices with different clients of the same type, an 

estimated transaction price should be collected. A recent transaction which is representative of 

 46 
the establishment’s business should be chosen. Each month during repricing, the respondent 

will estimate the per license price for the chosen transaction if a similar client were to purchase 

the same number of licenses. 

Renewed software maintenance prices 

Since the price of first year maintenance will always be collected with the price of enterprise 

license agreements, renewed maintenance agreements will be allowed a separate chance of 

selection. These transactions will be collected with an estimated transaction price. 

Maintenance is charged as a fixed percentage of the initial license price. The price of renewed 

maintenance will always be tied to the price of the license at the time it was initially transacted. 

Over time, the price of renewed maintenance transactions should move in the same direction as 

the price of the firm’s license sales for any given software product. This will be lagged, 

however, with the prices of recent renewed maintenance transactions based on the license 

prices for the products in the preceding years. 

For these transactions, a typical, recently renewed maintenance transaction should be selected. 

The product configuration (i.e. number of client and server licenses) and the number of years 

since the initial license sale will be noted. During repricing, the respondent will estimate the 

price of renewed maintenance in the current month for the specified licensing configuration 

purchased a specified number of years ago. For example, if the selected transaction is for a 

renewed maintenance agreement for a license purchased 2 years ago, in July 2005 the 

respondent will estimate the price of renewed maintenance based on the license sale prices in 

July 2003. In August 2005, the respondent will estimate the price based on license sale prices 

in August 2003. 

Prices for other services related to software 

Other software related services, such as technical support, consulting, and training, will be 

collected with the price of the entire engagement, or the entire term of service for any given 

project. The price will typically be expressed as the sum of the dollar values for each billed hour 

of time that a software publisher’s employees worked on the project. In future months, the 

respondent will provide an estimated transaction price of what would be charged if they were to 

offer the same type of service to a similar client. If the responding firm has specific service 

offerings that they provide repeatedly, such as regular training classes or standard technical 

support offerings for packaged software, then the respondent may provide an actual transaction 

price based on the most recent sale of the service offering. 

3.5.2.2 Service/Pricing Characteristics 

System software 

The Census Bureau classifies the following types of software as system software: operating 

systems software, network software, database management software, and development tools 

and programming languages software. 

Operating systems software handles the interface to peripheral hardware, schedules tasks, 

allocates storage, and presents a default interface to the user when no application program is 

running. Network software controls, monitors, manages and communicates with operating 

systems, networks, network services, databases, storage and networked applications in an 

 47 
integrated and cooperative fashion across a network from a central location. Database 

management software enables the storage, modification, and extraction of information from a 

database. Development tools and programming languages software assists in the development 

and/or authoring of computer programs and supports the professional developer in the design, 

development, and implementation of a variety of software systems and solutions. 

Desktop and portable device application software 

Desktop and portable device application software includes software that is often used for home 

or personal use and usually consists of a single license for use on a single computer, such as a 

PC, laptop, PDA, or other device. Examples of desktop and portable device application 

software include word processing software, spreadsheet software, personal finance software, 

and tax accounting software. This type of software may be purchased by both businesses and 

households. 

Other application software publishing, including utilities software and cross-industry and 

vertical market enterprise applications 

Utilities software runs tasks to maintain and monitor the computer system and its data files. 

Examples of utility software include virus checkers and screen savers. Cross-industry 

enterprise application software performs or manages a specific business function or process 

that is not unique to a particular industry. Examples include general administrative software 

such as HR software and accounting software. Vertical market enterprise application software 

performs a wide range of business functions for a specific industry group such as 

manufacturing, retail, healthcare, or engineering. Both of these latter types of enterprise 

software are typically server based. 

Game Software 

Game software is usually purchased by households. It includes software which runs on PCs as 

well as video game console platforms. Game software includes only the game cartridges or 

discs. The consoles or devices used to run the cartridges or discs are not classified in this 

industry. 

Technical support, training, and other services related to software publishing 

Software publishers provide other primary services to aid in the successful use of their software. 

These services include technical support, consulting, implementation, and training services. 

These services are considered primary to the industry only when software publishers offer these 

services for their own published software. 

Software publishers also offer software product updates and maintenance agreements. 

Constant quality measurement issues 

Software publishers are constantly enhancing their software products with new features and 

functionality. We currently substitute by direct comparison when the differences between the 

current and new products are minimal. When there are large changes in functionality, such as 

the release of a new version, we attempt to approximate the value of the quality change by 

asking respondents to estimate the development costs associated with the enhancements made 

to the new version as well as the total number of licenses sold of the previous version. This 

 48 
gives us a per-unit estimate of the production costs associated with the quality change in the 

software which we can use to make a price adjustment. 

With the rapid technological change in this industry, it is necessary to periodically augment the 

sample in order to capture revolutionary products. This procedure allows for pricing a better 

overall mix of current software products, licensing models, and related services offered in the 

market place. 

3.5.2.3 Sample Unit Identification and Frame and Sampling Issues 

For virtually all sample units, however, the sample unit will refer to the operations of the entire 

firm. However, in some cases, the sample unit may be the software publishing division of a 

larger firm that operates across multiple industries, such as computer systems design, and 

computer hardware manufacturing. 

3.5.3 Television Broadcasting 

3.5.3.1 Output Measurement 

Output definition 

The primary output of this industry is the provision of broadcast television signals to an 

audience, which can be measured through the sale of advertising time during which specified 

levels of audience are available. Secondary to the provision of broadcast television signals, 

most television stations, networks, and barter syndicators provide additional levels of support, 

whether it is production of the advertisement or verification services. These services may 

include verification that the advertising took place and what audience was delivered during the 

running of the advertisement. 

Pricing methodologies 

Television Stations 

The preferred price for television advertising sales is an average spot rate for a selected 

daypart. For example, if the daypart selected is prime time, then the average spot rate received 

by the local TV station for performing advertising services should be collected. This average 

should be calculated by dividing total revenue for selected daypart by total number of spots 

(local spots for local advertising and national spots for national advertising) sold for that daypart. 

This typically will be referred to as the station’s base rate. This average can be calculated for 

any time period for which the respondent has data (day, week, month, etc.). An alternative 

method for determining the average rate uses the average cost per point or cost per thousand 

figures with the corresponding audience data. For example, if the average prime time CPP is 

$300 and the station averages an 8 rating for prime time, then the average spot rate is $2,400 

($300 * 8). 

For advertising, a fallback price is the spot rate, which is the actual rate received by the station 

for selling advertising services. In standard PPI pricing terms, this is an actual transaction rate. 

List prices are appropriate from stations that sell advertising services directly from a list, or rate 

sheet. These prices are also appropriate when average and actual prices cannot be obtained. 

 49 
For network television affiliate services, the price is the annual contract amount, or “network 

compensation,” that local stations receive from networks for carrying the network’s 

programming. 

Networks and Syndicators 

The methodology for pricing network advertising is the same as described for local stations. 

For programming contracts, syndication companies receive an annual fee. A specific contract is 

selected initially and the fees are updated when the contract is renewed. 

3.5.3.2 Service/Pricing Characteristics 

Television Stations 

Television station advertising sales include the sale of advertising time to both local and national 

advertisers. Included in the time devoted for various types of programming that is broadcast by 

the local television stations is commercial advertising time. Local stations can sell this time in 

increments, known as spots, to both local and national advertisers. Local advertisers are 

establishments located within, or close to, the broadcast coverage area of the local station. An 

example of a local advertiser is an automobile dealership located in the same city as the station. 

National advertisers are establishments that in addition to conducting business within the 

coverage area of the station, have operations in other parts of the country as well. For example, 

automobile manufacturers such as Ford, General Motors, or Honda, are national advertisers. 

In addition to revenue received from the sale of advertising time, local stations affiliated with a 

broadcast network agree to broadcast the network’s programming and commercials in their 

respective markets. In return for doing so, networks provide compensation and advertising time 

during its programming to the local stations. In addition, local stations are able to provide 

programming content to its viewers typically at a lower cost than by acquiring it on its own. 

Networks and Syndicators 

Like local television stations, networks and national barter syndication companies sell 

advertising time during their programming to national advertisers. This differs from local TV 

station advertising because of the mass audience capabilities. Network programming and 

nationally syndicated programs are capable of reaching the entire television household 

universe. It is very important for national barter syndicators to clear their programming in as 

many markets as possible in order to be capable of reaching the largest possible audience. 

Clearing their programming refers to getting agreements from local TV stations to air the 

syndicated programming in their market. 

Constant quality measurement issues 

A primary concern for television advertising is the inconsistency in the viewing audience over 

time. Seasonal changes in viewing habits and special programming tend to influence the 

amount of audience available to advertisers. By pricing average advertising rates, constant 

quality is maintained and no further adjustments are necessary. 

 50 
3.5.3.3 Sample Unit Identification and Frame and Sampling Issues 

The sample unit is an individual local station, network, or syndication company. 

The frame used for this industry was the Cable and Television Factbook. This source provided a 

comprehensive list of local television stations with average weekly circulation as a size 

measure. Networks and syndicators were not available in this frame. Therefore, a frame was 

developed using Internet listings. The two frames were treated as separate strata. 

3.5.4 Cellular and Other Wireless Telecommunications 

3.5.4.1 Output Measurement 

Output definition 

The primary output of wireless telecommunication is that of placing parties in communication 

with each other by a radio tower network, which is networked by a wireline telephone network 

which is transparent to the end-user. The wireless telecommunication interface is characterized 

by relatively low-power omni-directional transmission between portable transmission devices 

and transmission towers. Cellular telephone services including traditional cellular service, 

Personal Communications Service (PCS), and Enhanced Specialized Mobile Radio (ESMR), 

are defined for this index as being “voice-grade” while speeds greater than 64kbps (kilobytes 

per second) are considered data. Some in the industry reserve the term “broadband,” which is 

also considered output of this industry, for speeds greater than 200kbps. 

Pricing methodologies 

The preferred price to collect for wireless telecommunications is fixed-weight average revenue 

for providing service to a specific market. Carriers are asked to provide average base period 

(billed) units of consumption, which will remain fixed during repricing, and average revenue per 

unit of consumption. The average revenue would be updated monthly, but would be calculated 

from current period units and revenues. 

The price is obtained by computing the average price for each type of charge, multiplying the 

averages by their respective weights, and then summing the resultant revenues. This is not

average revenue per line, which is revenue divided by the number of lines. This is revenue per 

average line, which is average prices multiplied by weighted (averaged) consumption. Also, 

note that revenue for some plan features, included in the final price, may be an average per line. 

The following types of charges are included in the average revenue: 

• Access charge. The basic charge is the line charge (the charge for a number) for cellular 

and other wireless customers. This is considered a monthly recurring charge. 

• Usage charges based on time. Cellular usage, both inward (calls received) and outward 

(calls made), is metered and billed. Billing can be uniform (the first and last minute billed 

alike) or the initial period can be of a different duration or a different rate or both. At least 

one carrier charges for an initial period of one minute while additional periods are in 

increments of one second in duration. At least one carrier does not charge for the first 

incoming minute. Most carriers offer billing plans that contain an allowance, or “free” 

 51 
minutes of airtime. There is usually an opposite but indirect relationship between the 

amount of free airtime and the recurring monthly charge. A high monthly charge guarantees 

a cash flow to the provider regardless of the vagaries of usage. 

In addition to the standard usage charges, other charges, such as roaming minute charges, 

can be billed. These are charges for calls outside the providers' service area. They are 

much more expensive per minute, but otherwise they are treated the same as standard 

usage. 

• Usage charges other than timed. Some charges are based on factors other than time. The 

most common are charges computed on a per-call basis. These charges are usually in 

addition to timed usage charges. Some roaming charges are rated on a per call basis and 

companies charge a fixed fee per day that roaming charges are incurred. For example, if 

your base area is Washington, D.C. and you place calls from Florida on one day, one would 

pay: 1) the day fee, 2) the roaming charge, and 3) the long distance telephone toll charges. 

A per-call charge might not be charged or could be charged in lieu of the roaming minute 

charge, or in addition to the roaming minute charge. Fee schedules are not uniform in 

structure or amounts. 

• Individual features and feature packages. Cellular customers are much like wireline 

telephone customers in that new features, or options, are constantly being offered. Most 

features are offered on a per line basis although some could be billed on a per-account 

basis. These features include caller-ID, call waiting, and voice-mail. All these features are 

alike in the sense that they utilize the computerized switching equipment that provides the 

basic ability to control the network in the first place. 

• Non-recurring charges. These are one-time charges like activation fees, cancellation fees, 

etc. Activation fees are routinely waived in promotion programs. The two major causes of 

plan cancellations are 1) switching from one plan to another within the same company (in 

which case fees are routinely waived) and 2) bankruptcy (in which case the fee is uncollectible). Basically, non-recurring fees are waived so often that they have no noticeable 

effect on total revenue. 

Note that revenue for some plan features, included in the final price, may be an average per 

line. 

If a company is unable to provide the average revenue, it is acceptable to price a bill for a 

standard service package. 

3.5.4.2 Service/Pricing Characteristics 

The types of wireless services included in this industry are defined as follows: 

 

Cellular and other (Voice Grade) wireless services 

These services allow customers to converse or send data just like a wireline service. The 

distinction between the three types of voice-grade wireless services (cellular, PCS, and ESMR), 

is primarily broadcasting frequency and how they are licensed. To the buyer, the technical 

differences between the three are essentially transparent. 

 52 
Multiple purchasing plans exist for each of these services, but these are billing arrangements 

not different services. Computer systems allow many options but the service is still “talking”.

Broadband 

This service allows data and graphics to be sent interactively over a network. This is essentially 

wireless internet and functions at the 200+kbps range. 

Data (Instant Messaging) 

This service allows data and graphics to be sent interactively over a network. This is most 

efficiently done in the 65-200 kbps range to take full advantage of the digital network and 

protocols of the broadband wireless network. 

Constant quality measurement issues 

There is a strong concern about new item bias in this industry. New services in this industry are 

expected to be introduced frequently and to become popular quickly. When completely new 

services are introduced there is concern about when to include them and how to adjust for their 

weight. The introduction of new products or service features after the index reference date is 

problematic for a Laspeyres index. However, if the index is not augmented to show these new 

services, new item bias will result. New service features are generally included as “other 

revenue” in the average price calculation and they are not discernible from the existing features.

3.5.4.3 Sample Unit Identification and Frame and Sampling Issues 

The frame source is the Cellular Telecommunications Industry Association (CTIA) research 

department. This frame was segmented into three explicit strata that correspond to the FCC 

licensing classifications. The frame represents those establishments that have their own 

facilities and therefore provide an exhaustive list. Resellers are out of scope. “Plane phones” 

and “train phones” were truncated. Cellular and other wireless services are treated as separate 

establishments from other lines of business even when owned by the same company and 

located at the same address. 

The traditional cellular strata consist of those MSA and RSA licenses awarded in the 1980’s 

auctions for cellular service. There are two bands for each license area. One band was 

awarded to long distance carriers and the second to other carriers generally but not exclusively 

to local phone companies. The PCS includes the winners of the 1990’s PCS license auctions. 

The basis for a PCS license is a much larger geographic area than for the first cellular licenses 

and there are six licenses instead of two for each area. In some cases, traditional and PCS 

license areas are subdivided with separate carriers in each subdivision. The ESMR strata 

consists of those companies originally providing “push-to-talk” service, but upgraded to a 

cellular-like service. 

Within each stratum, the first step of disaggregation was geographic area. The sample was 

designed in this manner to minimize multiple selections in the same geographic areas while still 

sampling proportionate to size. In addition, items can be followed if the sampled license area is 

sold to another company. 

 53 
These sampled license areas were then grouped according to the company that holds the 

license to form one sample unit. The number of quotes requested from each company 

corresponds to the number of geographic areas hit. 

Government Regulations 

Licenses to provide cellular services were auctioned by the FCC during the 1980’s and 

correspond to either a Metropolitan Statistical Area (MSA) or a Rural Statistical Area (RSA). 

Having public records of these licenses allowed the PPI to develop a sample frame that was 

exhaustive of all wireless companies operating in the US as well as to sample by geography. 

3.5.5 ISPs and Web Search Portals 

3.5.5.1 Output Measurement 

Output definition 

The primary output of Internet service providers (ISP) is the provision of Internet access to a 

group of subscribers. These subscribers may be residential households, business or 

institutional facilities, or other Internet access providers. The unit of measure for this industry is 

an individual connection to the Internet. 

The primary output of web search portals is the provision of a tool that allows an Internet user to 

locate particular sites that are of interest. This can be measured through the sale of listings and 

advertisements to companies who are interested in making an impression on the audience of 

Web searchers who visit the site. 

It is difficult to ascertain whether certain product bundles reflect services that should be 

considered as primary to this industry. Some firms may offer services that bundle access 

services with other non-primary services, such as Web hosting. 

Pricing methodologies 

For Internet access services, the preferred price is an average price. This is the average of all 

rates that are charged to customers on a specific billing cycle for a specific form of access within 

a specific period of time. The average for each mode of access, such as dial-up, DSL, and 

leased line, will be collected as an average per line (the term “connection” may be used for dialup and DSL). For leased line service, this average charge will be the average rate per line. 

An individual actual transaction price was collected if average price data were not available. If 

this type of price is used, an individual transaction is selected for collection. However, for 

residential dial-up and DSL service, this will typically be the list price. This list price is 

acceptable for dial-up and DSL service only if the provider does not offer a significant amount of 

discounts. 

For web search portals, the preferred price is an average of all rates that are charged to all 

customers for a specific form of advertising or listing service. These averages may be collected 

using click, impression, or paid inclusion as the unit of measure. Advertising formats include 

banners, classifieds, and pop-ups. Listings formats include directory, index, affiliate, and 

sponsored search. 

 54 
An estimated transaction price was collected for web portal advertising and listings services if 

average price data were not available. This price should represent an estimate of what the 

seller would receive for a specific type of advertisement or listing if it were to be sold each 

month. 

An individual actual transaction price was to be collected for distribution partner licensing 

services. 

3.5.5.2 Service/Pricing Characteristics 

Internet service providers 

Dial-up and DSL Internet access is the provision of Internet access along the shared telephone 

network. With dial-up access, a modem at the end user’s site converts an analog signal into a 

digital format that can be displayed on a computer screen. DSL technology provides a 

completely digital connection between the ISP and the user that allows Internet access to 

remain active at all times. ISDN lines also provide a digital connection, but are still considered a 

dial-up service because the connection does not remain active at all times. 

Leased line Internet access is the provision of Internet access along a private telephone line 

reserved wholly or primarily for the use of an individual client. This service is provided to 

business and institutional users who require a large amount of Internet bandwidth capacity for 

their data processes. Examples of telecommunications lines that may be leased for Internet 

access include T-1, T-3, OC-3, and OC-12 lines. 

Other Internet access and related services includes the provision of Internet access using any 

technologies other than dial-up, DSL, and leased lines. This includes wireless access, cable 

access, dark fiber Ethernet access, and satellite access. Also included in this group is 

advertising services offered by ISPs. 

For Internet access, the most important price determining characteristics are the speed of the 

Internet connection and whether the access remains “always on”. With dial-up access, a user 

must wait for a dial-up connection each time the Internet is being accessed. With DSL and 

leased line access, the connection remains “always on” and available at all times. The speed of 

the connection, measured in data transfer capacity or bandwidth, determines how much data, in 

the form of Web pages, Web applications, and data files, can be carried along the Internet to 

and from the end user’s computer in a specific amount of time. Additional price determining 

characteristics for access services include the presence of bundled non-primary services such 

as Web hosting, e-mail, and instant messaging. 

Web search portals 

Web search portal listings services refer to the sale of inclusions in the results of keyword 

generated searches on Web sites. The most common types of listings are sponsored search, 

directory, and index. These listings may be sold on a “price per click” or flat rate (inclusion) 

basis. A click is an instance in which an Internet user clicks upon a listing in order to proceed to 

the listed company’s Web site. An inclusion is an individual Web page listing in a search result. 

The most important price determining characteristics include the position of the purchased 

listing within the search results, and whether it includes a short written description of the listed 

 55 
site. Another potentially important factor in the price of a listing is the amount of times that an 

Internet user clicks on it. Sometimes a buyer has to pay a set amount for each time their listing 

is clicked upon. 

Web search portal advertising services include the sale of advertising on the portions of a Web 

search portal site not dedicated to listings results. The most frequent forms of advertisements 

include banner advertisements, pop-up advertisements, and classified advertisements. These 

advertisements may be sold on a “price per impression”, “price per click”, or flat rate basis. An 

impression is an instance in which an advertisement appears on the computer screen of an 

Internet user. A click is an instance in which an Internet user clicks upon an advertisement in 

order to proceed to the advertising company’s Web site. 

The prices of advertising services are also sometimes determined by the number of times that 

they are clicked upon. The frequency of an advertisement’s appearance on a user’s computer 

screen can also be used to set the price. Generally, the size of the advertisement and its 

position on the computer screen will be key in determining its value and price. Also important 

are the size of the audience that visits the Web page on which the advertisement will run and 

the demographic makeup of that audience. 

Other Web search portal services include Web search portal distribution partner licensing 

services. This refers to the sales of listings by a Web search portal to any other site for a cash 

fee. Frequently the other site will be another Web search portal. Any type of listings service 

can be sold in a distribution partner licensing contract. 

 

Constant quality measurement issues 

In recent years, broadband Internet connections have grown in popularity as customers move 

away from the slower dial-up access to high speed connections like ADSL. This shift has 

become potential a source of new item bias. Directed substitution procedures will be 

implemented to determine if item substitution is necessary. 

3.5.5.3 Sample Unit Identification and Frame and Sampling Issues 

Many sample units are part of larger companies that are classified in other industries such as 

wired telecommunications or cable television. For these sample units, especially the backbone 

service providers, it was necessary to isolate the appropriate profit maximizing center (PMC) for 

the Internet access services and collect data provided by that PMC only. These larger 

companies did not appear in the frame since they were classified in other industries and had to 

be added. 

Due to the high number of births and deaths in these industries, it was necessary to oversample 

these industries. 

 56 
3.6 Professional Services 

3.6.1 Output Measurement 

Output definition 

The primary output of this subsector is the provision of services by professionals with 

specialized knowledge and the experience necessary to apply this knowledge. These 

professionals include lawyers, accountants, engineers, and architects. 

Pricing methodologies 

Prices for professional services are modified model prices. Most of the services provided in 

these industries are based on unique, non-recurring transactions. Such industries require a 

specific contract to be collected and set as a baseline transaction. Inputs are fixed according to 

this baseline transaction. Although the sample unit may never encounter the exact transaction 

again, respondents report the amount of revenue they would hypothetically receive if the same 

contract were negotiated using the same inputs. The following example illustrates the use of 

this modified model methodology: 

In the initial period, an accounting firm provides the following service description representing an 

actual service contract. 

Type of service: Auditing. Time required for service completion: 290 hours. Client information: 

Repeat customer; commercial business. Length of billing period: Single bill for entire service. 

Services included in engagement: 

Service rendered Rate Hours Total fee 

 Partner $375 10 $ 3,750 

 Manager $300 40 $12,000 

 Senior accountant $220 60 $13,200 

 Associates $125 180 $22,500 

 Total for services rendered: $51,450 

During the next repricing period, the respondent is asked to price the exact same service as 

initially described. 

There are several pricing alternatives across these industries. The most common methods 

include: 

 

• Contingency pricing - A contingency fee is a payment that is made only if a specified 

outcome is achieved. For example, a contract in legal services may include a contingency 

clause that payment will be made for a favorable settlement in a personal injury case. 

These settlements are typically one-time occurrences that vary greatly in the amounts that 

they pay out and have no correlation to inputs such as number of hours worked. 

 57 
• Flat fees – Professional may charge a single fee for service or project completion. 

Companies are asked estimate what the fee would be if the exact project were to be 

performed again. 

• Percentage of construction costs - This pricing method applies to architectural services. 

Companies are asked to estimate what the construction costs and percentage fee for the 

selected project would be if the service were to be performed again. 

• Percentage of first-year compensation – Executive search companies receive a percentage 

of the first-year salary for the position for which the executive is chosen. Companies are 

asked to estimate the salary and percentage fee for the selected position. 

3.6.2 Service/Pricing Characteristics 

The output priced in the professional services is a transaction representing a bundle of services. 

The transaction price is obtained by selecting a contract or billing invoice. PPI collects detailed 

information about the contract (or invoice). These details may include labor descriptions, labor 

costs, labor hours, expenses, reimbursables, construction costs, multipliers, or other negotiated 

mechanisms for setting the price.

Constant quality measurement issues 

Using model pricing for these industries allows the service delivery process, type of buyer, and 

contract terms to be held constant in most cases. Exceptions will occur when a service is no 

longer offered; a service is fundamentally altered due to government regulation; a service 

delivery process is modified; a service client change (loss of government contracts) or a service 

contract term(s) change. 

When a service is discontinued, an attempt will be made to substitute a similar service and 

directly compare prices (i.e., one with similar primary inputs and input quantities). If a service is 

fundamentally altered or the service delivery process is modified, a direct comparison may not 

be possible. Therefore, the best option is to identify the changes in primary inputs (i.e., type of 

labor input, rates, and quantities) for the purpose of accessing whether the new input 

requirements and their costs enable an explicit quality adjustment. 

However, certain technological improvements to inputs may enable the same exact service 

priced in a prior period to be produced more quickly (requires less labor-hours) in the current 

period thereby reducing costs that may lead to lower fees. In this case, input requirements have 

changed but the service provided has not, therefore the price reduction is valid and an explicit 

quality adjustment is unnecessary. 

The outputs of the professional services industries may evolve due to introduction of new 

technologies or new types of services leading to potential new item bias. To address this bias, 

the researcher periodically contacts each reporter to review their sampled services and 

determine whether new types of services have been introduced. If new services are identified, 

probability techniques are employed to give these new services a chance of selection. 

 58 
3.6.3 Sample Unit Identification and Frame and Sampling Issues 

The QCEW was used as the sample frame for the professional services. Depending on the 

industry, the sample unit is either the headquarters or an individual establishment. 

3.7 Administrative Services 

3.7.1 Temporary Help Services 

3.7.1.1 Output Measurement 

Output definition 

A temporary help service is primarily engaged in supplying temporary help (employees) or 

continuing help to other businesses on a contract or fee basis. The help supplied is on the 

payroll of the supplying establishment but is under the direct or general supervision of the 

business to which the help is furnished. Many temporary help services offer their workers the 

same benefits that regular employees enjoy, such as dental and health insurance, 401(k) plans, 

paid holidays, and vacation pay. The average length of stay for a temporary worker is about 6 

months, with very few staying for more than 2 years. 

Pricing methodologies 

The preferred price for temporary help services is the billing rate. This billing rate is the total 

amount the client company pays the temporary help service for the placement of temporary 

employees. This rate should not be confused with the pay rate – which is the rate a temporary 

help service pays the temporary employees. Collection of the billing rate is very convenient for 

reporters and helps ensure reporter compliance. 

3.7.1.2 Service/Pricing Characteristics 

The service that is priced is a specific job. 

Prices for temporary help are billed on a per hour basis, and range depending on the skill of the 

employee, their assigned employment sector and client characteristics. Different employment 

sectors command different pay scales. If a temporary help agency has many locations, location 

would be a price determining characteristic. For example, a secretary in Los Angeles would 

command a very different wage than a secretary in rural Alabama.

Constant quality measurement issues 

To maintain constant quality, the index disaggregates to a specific job instead of a specific 

contract, insuring that substitutes can be fairly easily acquired. When acquiring a substitute 

item, the price determining characteristics must be the same. For example, a substitute 

employee must have the same skills and work in the same assigned employment sector for a 

company with similar client characteristics. 

Specifically, the job characteristics of each position that we hold constant include length of 

assignment, work shift, client characteristics, level of position, years of experience, and 

requirements such as education level, licensing and typing/computer skills. To insure that we 

 59 
are also capturing discounts, a substitute employee should also come from a contract consisting 

of a similar number of employees and have the same risk evaluation. 

There is no explicit quality adjustment when a matching substitute is found. Thus, any change 

in the billing rate for the new employee is reflected as a price change. 

3.7.1.3 Sample Unit Identification and Frame and Sampling Issues 

The sample unit is the headquarters of the temporary help company. To be correctly classified 

in this industry, employees that are placed must be considered the employees of the sample 

unit. Otherwise, the company would be an employment placement agency. 

The QCEW was used as the sample frame for this industry. 

3.7.2 Employments Agencies 

3.7.2.1 Output Measurement 

Output definition 

Employment agencies are essentially engaged in the business of connecting employers and 

potential employees in the labor market. Their business is the business of solving the economic 

problem of imperfect information. If employers had perfect knowledge about all individuals in 

the labor market and all prospective employees had perfect information about what jobs were 

currently being offered in the market, then there would be no establishments in this industry. 

Thus, establishments in this industry operate as “matchmakers,” agents that make connections 

between those offering employment and those seeking employment. 

Contrasted with temporary help services, employees are compensated by the firm with which 

they are placed. 

Pricing methodologies 

The preferred price for employment agencies is the actual commission received for a single 

employee placement. This commission is a percentage of the expected first year earnings of 

the employee placed. 

An estimated price is used if no transaction was completed in a particular month. There are no 

“list” prices in this industry, due to commission-based pricing. 

3.7.2.2 Service/Pricing Characteristics 

There are two major factors that determine price in this industry: commission percentage, and 

the first-year compensation package of the position. 

The commission rate is generally market-determined, and tends to prevail industry-wide. 

The first-year compensation package is set by the client company, often with the agreement of 

the employment agency. Factors in determining the total compensation package generally 

relate to either describing the type of position being filled, or the type of employee being hired. 

 60 
Some examples of these qualities include position title and seniority on the job end, and 

employee education, experience, and qualification on the employee end. 

Constant quality measurement issues 

A good rule for determining whether a substituted service should be quality adjusted is to 

consider whether or not the new service represents a new form of business of the agency. For 

example, a retained search firm hiring a CEO of General Motors versus finding a new CEO for 

Lucent, is providing two very different services in one sense, but is really engaging in the same 

form of business. Thus, the disparate price changes would not be quality adjusted, as this is a 

price change that is really being felt by the company. 

Explicit quality adjustment may be feasible in certain circumstances. For example, if a firm has 

to provide a training course for a certain candidate to fill a position, the cost of the training 

course could be quality-adjusted out. 

On the other hand, a contingency payment recruiting firm that changes from filling mostly 

Operations, Administration, and Human Resources jobs to filling mostly Office and Clerical jobs, 

is changing their method of business. Therefore the subsequent price changes would be 

considered a “service substitution” and would be quality adjusted by a “link to show no change.” 

The above quality adjustment measures also apply to the e-commerce firms in this industry. 

3.7.2.3 Sample Unit Identification and Frame and Sampling Issues 

The sample unit is the headquarters of the placement agency. 

The main frame source is Kennedy Info Inc.’s “Search Select” Electronic Database of their 1999 

Directory of Executive Recruiters. Despite the title, the directory includes all employment 

agencies that receive commission payments. 

The source of the e-commerce strata is a Media Metrix ranking of the Top 15 Electronic 

Recruiters by market share, two of which were excluded as being out-of-scope. 

3.7.3 Janitorial Services 

3.7.3.1 Output Measurement 

Output definition 

The primary output is to furnish cleaning and maintenance services for buildings. Such cleaning 

services include janitorial services, maid/housekeeping, window cleaning, and chimney 

cleaning. 

Pricing methodologies 

The industry is dominated by contract pricing, although within each contract there is frequently 

some variation in the type of price. Establishments that provide janitorial/custodial services on a 

contract basis may charge a flat fee for their services. This flat fee is generally charged on a 

monthly basis and is sometimes billed on a per square foot basis. In addition, 

janitorial/custodial contractors may bill their clients on a cost plus markup basis. Establishments 

that bill in this type of manner compute all of their fixed and variable costs and then add a 

 61 
percentage of sales/costs or a flat fee onto their total costs. The markup percentage may 

depend on the type of service performed, as there is no industry standard. 

3.7.3.2 Service/Pricing Characteristics 

The primary services for this industry can be classified into a few major categories; descriptions 

of these primary services are outlined below: 

Janitorial/Custodial Services – Includes daily cleaning services such as floor cleaning, 

vacuuming, floor stripping/scrubbing/buffing, venetian blind cleaning, bathroom cleaning, 

wastebasket/ash tray emptying, and dusting. Janitors and custodians work primarily in 

commercial or public buildings. Also included in this segment of the industry are institutional 

maid/housekeepers who provide many of the cleaning services that janitors and custodians 

provide in office buildings; however, these industry members generally work at hospitals, 

nursing homes, and hotels/motels where additional linen services are performed. 

Maid/Housekeeping Services - Performed in a private home or other residential setting and 

may include other cleaning services such as stove cleaning, refrigerator cleaning, and other 

tasks that are considered time consuming and undesirable. 

Window Cleaning Services – Includes window washing and cleaning services. There is some 

specialization of service within this component of the industry, since many janitorial companies 

also perform window cleaning services as ancillary services. This service line encompasses all 

window cleaning services, including commercial and residential building window cleaning as 

well as high-rise and single-story buildings. Window cleaning establishments may also perform 

awning cleaning or metal maintenance cleaning services, which are both considered part of this 

industry. 

Chimney Cleaning Services - Includes services associated with cleaning chimneys. This 

service appears to be distinctive and unique in that only establishments specializing in chimney 

cleaning and repairs offer it. Providers of general maintenance and housekeeping services 

often do not include chimney sweeping among their services. Many chimney sweepers also 

provide chimney and flashing repair, chimney relining services, as well as masonry repair 

services, which are services classified in Masonry, Stone Setting, and Other Stone Work. In 

many situations, the chimney sweep may derive a plurality of revenues from the non-chimney 

sweep services and may be misclassified. The revenues from these non-primary services 

should be collected as an other receipt. 

Other Primary Services - Includes telephone booth cleaning and service station cleaning and 

degreasing. 

Constant quality measurement issues 

The characteristics of the service performed are held fixed allowing constant quality to be 

maintained over time. 

3.7.3.3 Sample Unit Identification and Frame and Sampling Issues 

The sample unit is the headquarters location of companies providing janitorial services. 

The QCEW was used as the sample frame for this industry. 

 62 
3.8 Transportation Services 

3.8.1 Passenger Air Transportation 

3.8.1.1 Output Measurement 

Output definition 

The primary output provided by establishments in this industry is the transportation of 

passengers over regular routes and on regular schedules. 

Pricing methodologies 

The type of price for the majority of this industry is average revenue per passenger. When 

calculating this average, a number of different time periods (e.g. day, week, month) can be 

considered. It would be optimal to use an entire month of data. By using data for travel that 

occurs throughout the month, any and all travel events would be included. However, this 

presents a problem in that respondents would need a number of days after the end of the month 

to calculate the average and this would introduce a one-month lag to the index. Thus, using a 

21-day time period for the current month was selected as an alternative. This allows ample time 

(on average 7 business days) for a participating airline to retrieve the data and submit it to be 

included for the current month’s index. Using a 21-day period also serves to produce a lower 

volatility index (versus a day or week) that more accurately measures industry price trends. 

Using this method allows the PPI to capture price trends from all levels of pricing (published and 

unpublished) and all distribution channels. Price changes due to a shift in the mix of distribution 

channels, web based fares or deep discount fares, infrequent fare sales, the substitution of fare 

codes over time, and zero fares (frequent flier mile tickets) can also be reflected in the index. 

For those establishments unable to provide the average revenue per passenger data, a fallback 

pricing methodology of pricing fare codes can be used. If this methodology has to be used, 

disaggregation to an individual fare code is necessary. Suggested breakouts to get to an 

individual fare code are restricted versus unrestricted, round trip versus one-way, or nonstop 

travel versus direct or connecting travel. These are only suggestions, as the airline may have 

others. 

3.8.1.2 Service/Pricing Characteristics 

The primary service characteristics include: 

 Region (domestic or international) 

 Market (origin and destination) 

 Cabin (first/business or coach) 

The average revenue per passenger will be collected for a given O&D and will be for either 

coach or first class (including business) passengers. Each market will either be classified as 

domestic or international, depending on the O&D. So the region, market, and cabin class will be 

held constant. Controlling for these variables should ensure comparability of the data through 

time. 

 63 
Constant quality measurement issues 

The development of the current pricing methodology grew out of increasing concerns that the 

PPI for airlines was exhibiting an upward bias. Some of the potential sources for this bias 

included the change in the mix of distribution channels, the transition to web based fares and/or 

deep discount fares, the substitution of fare codes over time, and the exclusion of zero fares 

(frequent flier mile tickets). By pricing individual fare codes, the PPI index had failed to capture 

these over time. 

Over the last few years the airlines’ mix of distribution channels has shifted and the Internet has 

become increasingly more prevalent, whether through an airline’s direct Internet website or 

through one of the many web based distributors. Looking at Internet fares, it was found that 

these fares can disappear as quickly as they appear, making any kind of comparison using the 

current methodology almost impossible. In some cases these fares never reappeared. In 

addition, since data is collected directly from participating airlines using unique fare codes, it is 

believed that pricing via other traditional distribution channels (e.g. call centers, consolidators, 

brick and mortar travel agencies) where the fare codes and pricing may be different has never 

been captured correctly. Different fare codes are offered through different distribution channels. 

For example, in any given month a consumer may find the cheapest fare on an airline’s website, 

on a third party internet website, or through a travel agent. Pricing individual fare codes not 

allow for an accurate comparison of this. 

Another issue is the substitution of fare codes over time. In general, the PPI had gradually 

moved to what is referred to as “core” fare codes. Even though many of our current fare codes 

may indeed be considered “discount” fare codes they do not reflect fare sales or deep 

discounts. These “core” fares tend to be offered all the time and may or may not be actually 

purchased in a given month. Although these fares do represent part of an airline’s pricing, they 

do not represent a very big portion of it. What the PPI ends up with is a group of fare codes that 

tend to move up in a slow and steady manner. The conclusion drawn from this is that pricing 

one fare code per O&D is not very reflective of the true price trends over time. The fact that a 

given airline may fly hundreds of routes and price discriminates in many ways on each of those 

routes is evidence that pricing one fare code per O&D does not accurately measure overall 

industry price trends. 

3.8.1.3 Sample Unit Identification and Frame and Sampling Issues 

The frame used for sampling this industry was the UI file from 4th quarter 2004, augmented by 

using the BTS Air Carrier Financial Reports (Form 41 Financial Data). These were treated as 

two separate frames.

4 Where Does the PPI Go from Here? 

4.1 What Aggregation Strategies Should Be Considered to Include 

 Services? 

4.1.1 Industry and Commodity Strategies 

With the PPI currently producing numerous individual detailed service indices and its coverage 

of over 76% of in-scope output of this sector, a natural question arises as to what kinds of 

economically meaningful aggregations of service based indices can be produced? While the 

 64 
focus of this section is on the research that is needed to develop a consensus on the publication 

of broad aggregates, such as a price index for the entire service sector, BLS is pleased to 

announce that planning is currently underway to begin calculation of additional aggregate 

indices for service subsectors and selected cross-sector aggregations. A companion paper 

describing these plans has been prepared for the June 9 FESAC meeting. The goal of adding 

selected aggregation detail to service industry PPIs is partly the result of the feedback received 

from the December 2005 FESAC meeting. For additional information, please see the paper, 

“Plans for New PPI Service Sector Aggregation Indexes” by Maureen Doherty and Roslyn 

Swick. 

What are the various possible aggregations that could be developed to include the greatly 

expanded coverage of the service sector? One possible aggregation scheme for service 

industries would be to aggregate together all services. An industry index that nets out the flow 

of services between the services industries could be developed. A commodity based index 

based on the gross output of the service sector could also be produced. 

In constructing aggregations of service industry indices, one distinction that is often drawn is the 

division between traditional service providing industries and distributive service industries – the 

latter including the NAICS sectors for Transportation, Wholesale Trade and Retail Trade. A 

second possibility would be to produce both net output and commodity indexes for traditional 

services, distributive services, and an index combining the two aggregates. Yet a third 

possibility, also consistent with some international practices, is to include transportation in 

traditional services and define distributive services as wholesale and retail trade. 

A total industry index could also be produced that aggregates together services, distribution, 

manufacturing, agriculture and mining industry indices. This index would be an industry index 

that represents transactions in these industries which are going to final demand since all 

intermediate demand is netted out. 

Weights for all these industries could be derived or obtained from the Economic Census data or 

Bureau of Economic Analysis data either in the form of Made-In-Industry weights, WhereverMade weights or Input-Output data. 

4.1.2 Special Aggregate Indices 

A variety of special aggregations could be produced using data from all sectors of the economy 

that are priced in the PPI program. 

A series of commodity and industry indices could be produced that are based on the gross fixed 

investment or the personal consumption expenditures data found in the BEA national accounts 

input output tables. 

A special index could also be developed that measures business services. Most international 

definitions of business services include service sector industry output that is used for 

intermediate demand. Service and transportation indices are generally used for producing 

these indices. This index would generally be compiled from commodity data since commodity 

data are the international standard for PPIs as defined by the International Monetary Fund 

manual on Producer Price Indices. 

Other possible aggregations may be used for specific groups of services. An index that 

combines various financial industry or commodity indices may be produced. For example, there 

 65 
are currently two different PPI banking industries, both of which provide loans and deposit 

services. These two industries are Commercial Banks and Savings and Loans Institutions. 

From data in these two industries and any future financial industries that provide loans and/or 

deposit services, an index for all loans, all home loans, all auto loans, etc. may be developed 

that aggregates the various loan services together to produce a comprehensive set of indices 

on loans. The same type of aggregation could be done for deposit services. 

Another special aggregation index could be developed for health services based on Major 

Diagnostic Categories (MDC) that would provide measurement of various treatments based on 

the MDCs. For example, indices from the hospitals, physicians, and pharmaceutical industries 

could be used to provide an index that measure the price of the various treatments based on 

MDCs. These series of indices are frequently requested and would be greatly utilized by both 

the medical community and the research community. 

Another special aggregation would be to produce stage of processing indices that include 

services. The SOP indices would be produced using commodity indices, industry indices, or a 

combination of both. 

4.1.3 Future Developments 

If any of these aggregate indices were to be developed at the current time, they would have to 

be constructed from the lowest level industry indices, since current PPI systems allow an item to 

be used in only one lowest level index. However, over the next two years, the PPI program will 

have new computer and estimation system capabilities, which will allow items to be used in 

multiple lowest level indices thus permitting greater flexibility in the index construction 

techniques that can be employed. In addition, the PPI program has embarked on a research 

project to evaluate the viability of potential aggregation structures. Research areas may include 

determining the economic interpretation of the index, examining the index’s relative volatility, 

and analyzing the usefulness of the index to data users. Once the research is completed and 

the new computer system is available, the PPI will be able to begin calculating new indexes 

based on our research results. 

4.2 What are the Gaps? 

Although the focus of this paper has been on the expansion of the PPI Program’s coverage of 

the service-providing sector, there has been significant expansion of it coverage of nonresidential construction. Indexes for four new building types are in various stages of planning, 

initial data collection, calculation and publication. New Warehousing and New Office 

Construction are in publication, New School Construction is being published in July 2006, and 

New Industrial and Manufacturing Buildings are being added in 2007. PPI is also planning on 

publishing, in 2008, indexes for four specialty building contractor trades to reflect work on new 

structures and maintenance of existing structures. 

Despite these advances in coverage, significant gaps remain. The PPI program is beginning a 

comprehensive review of its coverage gaps and is attempting to determine methods for 

identifying and prioritizing the order of adding new industries into the family of indexes it 

produces. This section lists the gaps that exist and the next section provides an initial set of 

possible criteria for identifying this priority list. 

 66 
This first list shows the NAICS industries that are simply out of scope for the PPI program. 

These industries do not have measurable marketed output and therefore, not eligible for 

inclusion in the PPI. 

Table 1 

2002 NAICS Code Industry Title 

488111 Air Traffic Control 

519120 Libraries and Archives 

519190 All Other Information Services 

521110 Monetary Authorities - Central Bank 

541710 Research and Development in the Physical, Engineering, and Life Sciences 

541720 Research and Development in the Social Sciences and Humanities 

561591 Convention and Visitors Bureaus 

611110 Elementary and Secondary Schools 

611513 Apprenticeship Training 

624110 Child and Youth Services 

624120 Services for the Elderly and Persons with Disabilities 

624190 Other Individual and Family Services 

624210 Community Food Services 

624221 Temporary Shelters 

624229 Other Community Housing Services 

624230 Emergency and Other Relief Services 

624310 Vocational Rehabilitation Services 

813110 Religious Organizations 

813211 Grantmaking Foundations 

813212 Voluntary Health Organizations 

813219 Other Grantmaking and Giving Services 

813311 Human Rights Organizations 

813312 Environment, Conservation and Wildlife Organizations 

813319 Other Social Advocacy Organizations 

813410 Civic and Social Organizations 

813910 Business Associations 

813920 Professional Organizations 

813930 Labor Unions and Similar Labor Organizations 

813940 Political Organizations 

813990 Other Similar Organizations (except Business, Professional, Labor, and Political Organizations) 

814110 Private Households 

525110 Pension Funds 

525120 Health and Welfare Funds 

525190 Other Insurance Funds 

525910 Open-End Investment Funds 

525920 Trusts, Estates, and Agency Accounts 

525930 Real Estate Investment Trusts 

 67 
2002 NAICS Code Industry Title 

525990 Other Financial Vehicles 

551111 Offices of Bank Holding Companies 

551112 Offices of Other Holding Companies 

551114 Corporate, Subsidiary, and Regional Managing Offices 

336414 Guided Missile and Space Vehicle Manufacturing 

336415 Guided Missile and Space Vehicle Propulsion Unit and Propulsion Unit Parts Manufacturing 

336419 Other Guided Missile and Space Vehicle Parts and Auxiliary Equipment Manufacturing 

 

 Source: PPI Coverage and Expansion Team 

This second list is a list of the industries that once had coverage in the PPI program but where 

no current coverage exists. There are a variety of reasons why there is no longer any PPI 

coverage of these industries. Some of these industries are dying industries in the US economy. 

Some of these NAICS industries were formerly covered SIC industries that, when mapped to 

newly created NAICS industries, resulted in insufficient coverage to produce an industry index in 

the PPI program. 

Table 2 

2002 NAICS Code Industry Title Comments 

212231 Lead ore and zinc mining Insufficient domestic production 

325221 Cellulosic organic fiber manufacturing Insufficient domestic production 

331311 Alumina Refining (see note 1) Insufficient domestic production 

336992 Military Armored Vehicle, Tank, and Tank Component Manufacturing Other 

337129 Wood Television, Radio, and Sewing Machine Cabinet Manufacturing Insufficient domestic production 

441120 Used Car Dealers NAICS change 

444210 Outdoor Power Equipment Stores NAICS change 

445120 Convenience Stores NAICS change 

446120 Cosmetics, Beauty Supplies, and Perfume Stores NAICS change 

453910 Pet and Pet Supplies Stores NAICS change 

453920 Art Dealers NAICS change 

522190 Other Depository Intermediation NAICS change 

522210 Credit Card Issuing NAICS change 

524291 Claims Adjusting NAICS change 

524292 Third Party Administration of Insurance and Pension Funds NAICS change 

Source: PPI Coverage and Expansion Team 

This third list is a list of industries that are in scope in the PPI and where the PPI program 

currently does not have coverage. This list includes the industries listed in Table 2. 

 68 
Table 3 

2002 

NAICS 

Code Industry Title 

2002 

NAICS 

Code Industry Title 

111411 Mushroom production 237310 Highway, street, and bridge construction 

111419 Other food crops grown under cover 237990 Other heavy construction 

111421 Nursery and tree production 238111 Residential poured foundation contractors 

111422 Floriculture production 238121 Residential structural steel contractors 

111930 Sugarcane farming 238122 Nonresidential structural steel contractors 

111991 Sugar beet farming 238131 Residential framing contractors 

112340 Poultry hatcheries 238132 Nonresidential framing contractors 

112420 Goat farming 238141 Residential masonry contractors 

112511 Finfish farming and fish hatcheries 238142 Nonresidential masonry contractors 

112512 Shellfish farming 238151 Residential glass and glazing contractors 

112519 Other animal aquaculture 238152 Nonresidential glass and glazing contractors 

112910 Apiculture 238161 Residential roofing contractors 

112920 Horses and other equine production 238171 Residential siding contractors 

112930 Fur-bearing animal and rabbit production 238172 Nonresidential siding contractors 

112990 All other animal production 238191 Other residential exterior contractors 

113110 Timber tract operations 238192 Other nonresidential exterior contractors 

113210 Forest nursery and gathering forest products 238211 Residential electrical contractors 

114119 Other marine fishing 238221 Residential plumbing and HVAC contractors 

114210 Hunting and trapping 238291 Other residential equipment contractors 

115111 Cotton ginning 238292 Other nonresidential equipment contractors 

115112 Soil preparation, planting, and cultivating 238311 Residential drywall contractors 

115113 Crop harvesting, primarily by machine 238312 Nonresidential drywall contractors 

115114 Other postharvest crop activities 238321 Residential painting contractors 

115115 Farm labor contractors and crew leaders 238322 Nonresidential painting contractors 

115116 Farm management services 238331 Residential flooring contractors 

115210 Support activities for animal production 238332 Nonresidential flooring contractors 

115310 Support activities for forestry 238341 Residential tile and terrazzo contractors 

212231 Lead ore and zinc ore mining 238342 Nonresidential tile and terrazzo contractors 

221310 Water supply and irrigation systems 238351 Residential finish carpentry contractors 

221320 Sewage treatment facilities 238352 Nonresidential finish carpentry contractors 

221330 Steam and air-conditioning supply 238391 Other residential finishing contractors 

236115 New single-family general contractors 238392 Other nonresidential finishing contractors 

236116 New multifamily general contractors 238911 Residential site preparation contractors 

236117 New housing operative builders 238912 Nonresidential site preparation contractors 

236118 Residential remodelers 238991 All other residential trade contractors 

236210 Industrial building construction (see nonresidential tab) 238992 All other nonresidential trade contractors 

236220 Commercial building construction (see nonresidential 

tab) 325221 Cellulosic organic fiber manufacturing 

237110 Water and sewer system construction 326212 Tire retreading 

237120 Oil and gas pipeline construction 331311 Alumina Refining 

237130 Power and communication system construction 334611 Software Reproducing 

237210 Land subdivision 336992 Military Armored Vehicle, Tank, and Tank 

Component Manufacturing 

 69 
2002 

NAICS 

Code Industry Title 

2002 

NAICS 

Code Industry Title 

337129 Wood Television, Radio, and Sewing Machine Cabinet 

Manufacturing 487110 Scenic and Sightseeing Transportation, Land 

339116 Dental Laboratories 487210 Scenic and Sightseeing Transportation, Water 

425110 Business to Business Electronic Markets 487990 Scenic and Sightseeing Transportation, Other 

441120 Used Car Dealers 488210 Support Activities for Rail Transportation 

441221 Motorcycle Dealers 488390 Other Support Activities for Water Transportation 

441229 All Other Motor Vehicle Dealers 488410 Motor Vehicle Towing 

442291 Window Treatment Stores 488490 Other Support Activities for Road Transportation 

442299 All Other Home Furnishings Stores 488991 Packing and Crating 

444210 Outdoor Power Equipment Stores 488999 All Other Support Activities for Transportation 

445120 Convenience Stores 493190 Other Warehousing and Storage 

446120 Cosmetics, Beauty Supplies, and Perfume Stores 512110 Motion Picture and Video Production 

446199 All Other Health and Personal Care Stores 512120 Motion Picture and Video Distribution 

448130 Children's and Infants' Clothing Stores 512131 Motion Picture Theaters (except Drive-Ins) 

448150 Clothing Accessories Stores 512132 Drive-In Motion Picture Theaters 

448190 Other Clothing Stores 512191 Teleproduction and Other Postproduction Services 

451140 Musical Instrument and Supplies Stores 512199 Other Motion Picture and Video Industries 

451212 News Dealers and Newsstands 512210 Record Production 

453310 Used Merchandise Stores 512220 Integrated Record Production/Distribution 

453910 Pet and Pet Supplies Stores 512230 Music Publishers 

453920 Art Dealers 512240 Sound Recording Studios 

453991 Tobacco Stores 512290 Other Sound Recording Industries 

453998 All Other Miscellaneous Store Retailers (except 

Tobacco Stores) 516110 Internet Publishing and Broadcasting 

454390 Other Direct Selling Establishments 517310 Telecommunications Resellers 

481219 Other Nonscheduled Air Transportation 517410 Satellite Telecommunications 

482112 Short Line Railroads 517910 Other Telecommunications 

483112 Deep Sea Passenger Transportation 519110 News Syndicates 

483114 Coastal and Great Lakes Passenger Transportation 522130 Credit Unions 

483212 Inland Water Passenger Transportation 522190 Other Depository Credit Intermediation 

485111 Mixed Mode Transit Systems 522210 Credit Card Issuing 

485112 Commuter Rail Systems 522220 Sales Financing 

485113 Bus and Other Motor Vehicle Transit Systems 522291 Consumer Lending 

485119 Other Urban Transit Systems 523991 Trust, Fiduciary, and Custody Activities 

485210 Interurban and Rural Bus Transportation 523999 Miscellaneous Financial Investment Activities 

485310 Taxi Service 524127 Direct Title Insurance Carriers 

485320 Limousine Service 524128 Other Direct Insurance (except Life, Health, and 

Medical) Carriers 

485410 School and Employee Bus Transportation 524130 Reinsurance Carriers 

485510 Charter Bus Industry 524291 Claims Adjusting 

485991 Special Needs Transportation 524292 Third Party Administration of Insurance and 

Pension Funds 

485999 All Other Transit and Ground Passenger 

Transportation 524298 All Other Insurance Related Activities 

486210 Pipeline Transportation of Natural Gas 531110 Lessors of Residential Buildings and Dwellings 

486990 All Other Pipeline Transportation 531190 Lessors of Other Real Estate Property 

 70 
2002 

NAICS 

Code Industry Title 

2002 

NAICS 

Code Industry Title 

531390 Other Activities Related to Real Estate 541890 Other Services Related to Advertising 

532112 Passenger Car Leasing 541910 Marketing Research and Public Opinion Polling 

532210 Consumer Electronics and Appliances Rental 541921 Photography Studios, Portrait 

532220 Formal Wear and Costume Rental 541922 Commercial Photography 

532230 Video Tape and Disc Rental 541930 Translation and Interpretation Services 

532291 Home Health Equipment Rental 541940 Veterinary Services 

532292 Recreational Goods Rental 541990 All Other Professional, Scientific, and Technical 

Services 

532299 All Other Consumer Goods Rental 561110 Office Administrative Services 

532310 General Rental Centers 561210 Facilities Support Services 

532411 Commercial Air, Rail, and Water Transportation 

Equipment Rental and Leasing 561410 Document Preparation Services 

532420 Office Machinery and Equipment Rental and Leasing 561421 Telephone Answering Services 

532490 Other Commercial and Industrial Machinery and 

Equipment Rental and Leasing 561422 Telemarketing Bureaus 

533110 Lessors of Nonfinancial Intangible Assets (except 

Copyrighted Works) 561431 Private Mail Centers 

541191 Title Abstract and Settlement Offices 561439 Other Business Service Centers (including Copy 

Shops) 

541199 All Other Legal Services 561440 Collection Agencies 

541213 Tax Preparation Services 561450 Credit Bureaus 

541214 Payroll Services 561491 Repossession Services 

541320 Landscape Architectural Services 561492 Court Reporting and Stenotype Services 

541340 Drafting Services 561499 All Other Business Support Services 

541350 Building Inspection Services 561520 Tour Operators 

541360 Geophysical Surveying and Mapping Services 561599 All Other Travel Arrangement and Reservation 

Services 

541370 Surveying and Mapping (except Geophysical) Services 561611 Investigation Services 

541380 Testing Laboratories 561613 Armored Car Services 

541410 Interior Design Services 561621 Security Systems Services (except Locksmiths) 

541420 Industrial Design Services 561622 Locksmiths 

541430 Graphic Design Services 561710 Exterminating and Pest Control Services 

541490 Other Specialized Design Services 561730 Landscaping Services 

541511 Custom Computer Programming Services 561740 Carpet and Upholstery Cleaning Services 

541512 Computer Systems Design Services 561790 Other Services to Buildings and Dwellings 

541513 Computer Facilities Management Services 561910 Packaging and Labeling Services 

541519 Other Computer Related Services 561920 Convention and Trade Show Organizers 

541620 Environmental Consulting Services 561990 All Other Support Services 

541690 Other Scientific and Technical Consulting Services 562112 Hazardous Waste Collection 

541820 Public Relations Agencies 562119 Other Waste Collection 

541830 Media Buying Agencies 562211 Hazardous Waste Treatment and Disposal 

541840 Media Representatives 562212 Solid Waste Landfill 

541850 Display Advertising 562213 Solid Waste Combustors and Incinerators 

541860 Direct Mail Advertising 562219 Other Nonhazardous Waste Treatment and 

Disposal 

541870 Advertising Material Distribution Services 562910 Remediation Services 

 71 
2002 

NAICS 

Code Industry Title 

2002 

NAICS 

Code Industry Title 

562920 Materials Recovery Facilities 711110 Theater Companies and Dinner Theaters 

562991 Septic Tank and Related Services 711120 Dance Companies 

562998 All Other Miscellaneous Waste Management Services 711130 Musical Groups and Artists 

611210 Junior Colleges 711190 Other Performing Arts Companies 

611310 Colleges, Universities, and Professional Schools 711211 Sports Teams and Clubs 

611410 Business and Secretarial Schools 711212 Racetracks 

611430 Professional and Management Development Training 711219 Other Spectator Sports 

611511 Cosmetology and Barber Schools 711310 Promoters of Performing Arts, Sports, and Similar 

Events with Facilities 

611512 Flight Training 711320 Promoters of Performing Arts, Sports, and Similar 

Events without Facilities 

611519 Other Technical and Trade Schools 711410 Agents and Managers for Artists, Athletes, 

Entertainers, and Other Public Figures 

611610 Fine Arts Schools 711510 Independent Artists, Writers, and Performers 

611620 Sports and Recreation Instruction 712110 Museums 

611630 Language Schools 712120 Historical Sites 

611691 Exam Preparation and Tutoring 712130 Zoos and Botanical Gardens 

611692 Automobile Driving Schools 712190 Nature Parks and Other Similar Institutions 

611699 All Other Miscellaneous Schools and Instruction 713120 Amusement Arcades 

611710 Educational Support Services 713210 Casinos (except Casino Hotels) 

621112 Offices of Physicians, Mental Health Specialists 713290 Other Gambling Industries 

621210 Offices of Dentists 713920 Skiing Facilities 

621310 Offices of Chiropractors 713930 Marinas 

621320 Offices of Optometrists 713950 Bowling Centers 

621330 Offices of Mental Health Practitioners (except 

Physicians) 713990 All Other Amusement and Recreation Industries 

621340 Offices of Physical, Occupational and Speech 

Therapists, and Audiologists 721191 Bed-and-Breakfast Inns 

621391 Offices of Podiatrists 721199 All Other Traveler Accommodation 

621399 Offices of All Other Miscellaneous Health Practitioners 721211 RV (Recreational Vehicle) Parks and Campgrounds 

621410 Family Planning Centers 721214 Recreational and Vacation Camps (except 

Campgrounds) 

621420 Outpatient Mental Health and Substance Abuse 

Centers 721310 Rooming and Boarding Houses 

621491 HMO Medical Centers 722110 Full-Service Restaurants 

621492 Kidney Dialysis Centers 722211 Limited-Service Restaurants 

621493 Freestanding Ambulatory Surgical and Emergency 

Centers 722212 Cafeterias 

621498 All Other Outpatient Care Centers 722213 Snack and Nonalcoholic Beverage Bars 

621910 Ambulance Services 722310 Food Service Contractors 

621999 All Other Miscellaneous Ambulatory Health Care 

Services 722320 Caterers 

623220 Residential Mental Health and Substance Abuse 

Facilities 722330 Mobile Food Services 

623311 Continuing Care Retirement Communities 722410 Drinking Places (Alcoholic Beverages) 

623312 Homes for the Elderly 811111 General Automotive Repair 

623990 Other Residential Care Facilities 811112 Automotive Exhaust System Repair 

624410 Child Day Care Services 811113 Automotive Transmission Repair 

 72 
2002 

NAICS 

Code Industry Title 

2002 

NAICS 

Code Industry Title 

811118 Other Automotive Mechanical and Electrical Repair 

and Maintenance 812112 Beauty Salons 

811121 Automotive Body, Paint, and Interior Repair and 

Maintenance 812113 Nail Salons 

811122 Automotive Glass Replacement Shops 812191 Diet and Weight Reducing Centers 

811191 Automotive Oil Change and Lubrication Shops 812199 Other Personal Care Services 

811192 Car Washes 812210 Funeral Homes and Funeral Services 

811198 All Other Automotive Repair and Maintenance 812220 Cemeteries and Crematories 

811211 Consumer Electronics Repair and Maintenance 812310 Coin-Operated Laundries and Drycleaners 

811212 Computer and Office Machine Repair and Maintenance 812320 Drycleaning and Laundry Services (except CoinOperated) 

811213 Communication Equipment Repair and Maintenance 812331 Linen Supply 

811219 Other Electronic and Precision Equipment Repair and 

Maintenance 812332 Industrial Launderers 

811411 Home and Garden Equipment Repair and Maintenance 812910 Pet Care (except Veterinary) Services 

811412 Appliance Repair and Maintenance 812921 Photofinishing Laboratories (except One-Hour) 

811420 Reupholstery and Furniture Repair 812922 One-Hour Photofinishing 

811430 Footwear and Leather Goods Repair 812930 Parking Lots and Garages 

811490 Other Personal and Household Goods Repair and 

Maintenance 812990 All Other Personal Services 

812111 Barber Shops 

Source: PPI Coverage and Expansion Team 

4.3 What Principles Should Be Used to Determine where PPI Should Be 

 Expanded? 

Decisions are continually being made in the PPI program as to where resources are best placed 

in the program. As described above, critical resources are being used to develop the much 

needed new computer system for producing the PPI. In the future, it is hoped that existing or 

possibly additional resources can be used to provide additional detailed indices in the existing 

PPI industry and commodity indices and/or to expand into areas where there currently are no 

PPI industry or commodity indices. 

By researching where the PPI should expand or add index coverage, the PPI program is hoping 

to develop a systematic methodology for analyzing where the additional data should be added. 

The following is a list of possible criteria that could be used to determine where the additional 

resources should be utilized. 

1. Should the value of shipments or turnover for an industry or a product area be the primary 

basis for deciding the importance of producing indices for a particular industry or for 

providing more detailed indices for a particular industry? 

If value of shipments data based on 2002 Economic Census would be used to select the 

industries for PPI to expand, the following 25 non-covered industries have the highest 

values: 

 73 
2002 NAICS Code Industry Title 2002 VOS ($000) 

722110 Full-Service Restaurants 144,649,964 

236220 Commercial building construction 139,929,312 

236117 New housing operative builders 139,021,424 

238221 Residential plumbing and HVAC contractors 117,785,785 

722211 Limited-Service Restaurants 116,516,316 

522220 Sales Financing 115,236,407 

522294 Secondary Market Financing 102,426,532 

238211 Residential electrical contractors 82,141,261 

237310 Highway, street, and bridge construction 81,660,219 

541512 Computer Systems Design Services 78,335,457 

522292 Real Estate Credit 75,479,073 

621210 Offices of Dentists 71,102,922 

236115 New single-family general contractors 61,781,469 

541511 Custom Computer Programming Services 60,125,952 

531110 Lessors of Residential Buildings and Dwellings 55,295,976 

512110 Motion Picture and Video Production 46,761,808 

236118 Residential remodelers 45,034,336 

238912 Nonresidential site preparation contractors 37,442,354 

238911 Residential site preparation contractors 37,442,354 

522130 Credit Unions 37,050,065 

522210 Credit Card Issuing 35,855,753 

561730 Landscaping Services 35,171,624 

522298 All Other Nondepository Credit Intermediation 34,918,178 

237130 Power and communication system construction 34,810,458 

524130 Reinsurance Carriers 34,182,779 

2. Is the completion of a subsector a basis for determining if an industry index should be 

produced? Many times industries in the same subsector have similar products or services, 

so an already developed and vetted pricing methodology may already exist and can be used 

to produce indices for these industries. In addition, there may be substantial overlap 

between existing industries and new industries. By completing the subsector, better or more 

comprehensive commodity indices may be able to be developed. Some subsectors have 

PPI industry indices but these indices do not have sufficient weight so the PPI program 

cannot publish an aggregate index for these subsectors. For example, there may be 

industries A and B for which PPI has industry indices but no indices for industries C, D, and 

E. These three industries with no indices may make up 50% of the subsector with industry 

C accounting for 30% of the total weight. If an index is produced for industry C, then the 

subsector would have 80% coverage and an aggregate could then be produced for this 

subsector with no additional resources required. Would this be a sufficient reason to 

attempt to price industry C? An alternative strategy may be to develop PPI industry indices 

for subsectors where there is little or no coverage of the subsector. The advantage to 

producing industry indices in a subsector with little or no price indices would be two-fold. 

There would be additional information for any subsector that previously had no indices since 

there would now be indices. In addition, if the PPI program was producing aggregate 

indices for the entire US marketed economy or intermediate demand indices or any other 

stage of processing type indices, there would data to estimate other industry or commodity 

indices for the missing industries in that sector. 

 74 
There are three industries that were moved from services and retail trade to manufacturing 

in the NAICS. These industries would complete the in-scope manufacturing sector. These 

industries are: 

2002 NAICS Code Industry Title 

339116 Dental Laboratories 

334611 Software Reproducing 

326212 Tire retreading 

 

Currently, four industries, which represent 88% of NAICS subsector 523, Securities, 

commodity contracts, and other financial investments and related activities, have price 

indices in the PPI. In order to complete the coverage of this subsector, the following 

industries would be added to those four industries: 

2002 NAICS Code Industry Title 

523130 Commodity Contracts Dealing 

523140 Commodity Contracts Brokerage 

523210 Securities and Commodity Exchanges 

523910 Miscellaneous Intermediation 

523991 Trust, Fiduciary, and Custody Activities 

523999 Miscellaneous Financial Investment Activities 

There are several subsectors in the PPI that have no coverage. Subsectors 711, 

Performing arts, spectator sports, and related industries and 712, Museums, historical sites 

and similar institutions, are two these subsectors with no current price indices. If these 

subsectors were to be priced in the PPI, the following industries would be added: 

2002 NAICS Code Industry Title 

711110 Theater Companies and Dinner Theaters 

711120 Dance Companies 

711130 Musical Groups and Artists 

711190 Other Performing Arts Companies 

711211 Sports Teams and Clubs 

711212 Racetracks 

711219 Other Spectator Sports 

711310 Promoters of Performing Arts, Sports, and Similar Events with Facilities 

711320 Promoters of Performing Arts, Sports, and Similar Events without Facilities 

711410 Agents and Managers for Artists, Athletes, Entertainers, and Other Public Figures 

711510 Independent Artists, Writers, and Performers 

712110 Museums 

712120 Historical Sites 

712130 Zoos and Botanical Gardens 

712190 Nature Parks and Other Similar Institutions 

3. Should user demand for specific industries or specific detailed indices be a determining 

factor when deciding where to expand the PPI? Should the PPI program be surveying trade 

associations and other data users to determine areas where more indices are required? If 

so, what data users should be surveyed? What do other Federal agencies such BEA, 

Census and the Federal Reserve Board think are the most significant gaps to be filled in the 

future and in what priority? 

 75 
The PPI has begun an initial dialog with its counterparts in the BEA Current Industry 

Analysis Division. Based on this dialog, additional PPI data would be needed in the 

following industries: 

BEA Current Industry Analysis Division (CIAD) Priorities for BLS PPIs 

May 8, 2006 

 CIAD maintains and develops BEA’s Annual Industry Accounts (AIAs), which consist of 

the annual time series of input-output (IO) and GDP-by-industry tables. The commodity 

composition of each industry’s domestically-produced output and its inputs (including imported 

inputs) are derived at roughly the 6-digit NAICS level-of-detail within a balanced IO framework. 

Next, each industry’s contribution to real GDP growth is derived by deflating its outputs and 

inputs, primarily with BLS producer and international price indexes. BEA publishes quantity and 

price measures of industry output, input, and value added at roughly the 3-digit NAICS level-ofdetail for all private industries and government. 

 CIAD uses approximately 1,900 PPI’s and 270 IPI’s to deflate industries outputs and 

inputs, nonetheless, several gaps in PPI coverage exist which, if addressed, would significantly 

improve the accuracy of BEA’s quantity and price measures in several important industries. The 

PPI’s that CIAD needs to fill these gaps are listed below in priority order. 

Highest priorities 

1. Detailed wholesale trade PPI’s, as listed below in priority order. CIAD will be evaluating the 

recently-introduced wholesale trade PPI’s for the December 2007 update of the AIAs -- 

NAICS 423 (durables); 424 (nondurables); 425120 (agents and brokers) –- but more detailed 

deflation would significantly improve the quantity and price indexes for wholesale trade. 

 NAICS (WHOLESALE) DESCRIPTION 

 4247 Petroleum and Petroleum Products Merchant Wholesalers 

 4244 Grocery and Related Product Wholesalers 

 4234 Professional and Commercial Equipment and Supplies Merchant Wholesalers 

 42343 Computer and Computer Peripheral Equipment and Software Merchant Wholesalers 

 42344 Other Commercial Equipment Merchant Wholesalers 

 4238 Machinery 

 4236 Electrical and Electronic Goods Merchant Wholesalers 

 4231 Motor Vehicle and Motor Vehicle Parts and Supplies Merchant Wholesalers 

 4232 Furniture and Home Furnishing Merchant Wholesalers 

 4233 Lumber and Other Construction Materials Merchant Wholesalers 

 4235 Metal and Mineral (except Petroleum) Merchant Wholesalers 

 4237 Hardware 

 4239 Miscellaneous Durable Goods Merchant Wholesalers 

 4241 Paper and Paper Product Merchant Wholesalers 

 4242 Drugs and Druggists' Sundries Merchant Wholesalers 

 4243 Apparel, Piece Goods, and Notions Merchant Wholesalers 

 4245 Farm Product Raw Material Merchant Wholesalers 

 4246 Chemical and Allied Products Merchant Wholesalers 

 4248 Beer, Wine, and Distilled Alcoholic Beverage Merchant Wholesalers 

 4249 Miscellaneous Nondurable Goods Merchant Wholesalers 

 76 
2. Detailed retail trade PPI’s, as listed below in priority order. CIAD will incorporate BLS’s 

recently-introduced summary retail trade PPI’s in its 2006 annual update of the AIAs, but 

detailed deflation would also significantly improve the quantity and price indexes for retail 

trade. 

 NAICS (RETAIL) DESCRIPTION 

 45411 Electronic Shopping and Mail-Order Houses 

 45291 Warehouse Clubs and Supercenters 

 45300 Miscellaneous Store Retailers 

 454311 Heating Oil Dealers 

 454312 Liquefied Petroleum Gas (Bottled Gas) Dealers 

 454319 Other Fuel Dealers 

 44112 Used Car Dealers 

 44229 Other Home Furnishings Stores 

 44523 Fruit and Vegetable Markets 

 45299 All Other General Merchandise Stores 

 45439 Other Direct Selling Establishments 

 441221 Motorcycle Dealers 

 441229 All Other Motor Vehicle Dealers 

 445291 Baked Goods Stores 

 445292 Confectionery and Nut Stores 

 445299 All Other Specialty Food Stores 

 453991 Tobacco Stores 

 44813 Children's and Infants' Clothing Stores 

 45114 Musical Instrument and Supplies Stores 

3. Additional PPI’s for professional and business services industries (NAICS54-56), particularly 

for NAICS 55. 

 551111 – Offices of Bank Holding Companies 

 551112 – Offices of Other Holding Companies 

 551114 – Corporate, Subsidiary, and Regional Managing Offices 

4. PPI’s for detailed lines of property and casualty insurance services. Currently BLS publishes 

8 distinct PPIs here, but we’d like an expansion of detail following the lines of insurance 

shown in Best Aggregates and Averages. These lines do not have specific NAICS codes, but 

are covered under 524126 Direct Property and Casualty Insurance Carriers. For NAICS 

codes that are shown, we would like PPIs for 524127 Direct Title Insurance Carriers, 524128 

Other Direct Insurance (except Life, Health, and Medical Carriers) with some product 

breakout, and 524130 Reinsurance Carriers. 

5. PPI detail for commercial banks’ depositor services (e.g., ATM transaction fees and service 

charges on deposit accounts). PPI detail for banks’ loan services is excellent. 

6. Detailed PPI’s for securities brokerage services. We understand the present coverage as 

being commissions on trades for clients. We request 2 additional PPI’s: for commission 

charges and for other brokerage services. 

7. PPIs for Health care and social assistance (NAICS 62) at the 6-digit NAICS level of detail. 

8. PPIs for Educational services (NAICS 61) at the 5- or 6-digit NAICS level of detail. 

4. Should the particular characteristics of the industry be a determining factor in deciding 

where the expansion efforts should be employed? If a particular set of industries are 

conceptually easier to price in the PPI should they be given higher priority in determining 

which industries to survey? Or if some industries are conceptually more difficult to price, 

 77 
should they be given a higher or lower priority in determining what to price? Or if an industry 

would use a pricing methodology that has already been developed and tested for another 

industry index, should industry indices be developed for the new industry since little 

additional research is required? Should consideration be given to whether or not a quality 

adjustment strategy is available for an industry index? For example, PPI produced health 

services indices for many years even though only limited quality adjustment could be 

applied until recently. However, the PPI program has never produced a custom software 

index because there is no accepted quality adjustment strategy available. Would a custom 

software index be meaningful and useful if there was no quality adjustment methodology for 

the industry? 

Additional indices could easily be developed for subsector 524 using the current insurance 

methodology. These indices would be for the following industries: 

2002 NAICS Code Industry Title 

524127 Direct Title Insurance Carriers 

524128 Other Direct Insurance (except Life, Health, and Medical) Carriers 

524130 Reinsurance Carriers 

524291 Claims Adjusting 

524292 Third Party Administration of Insurance and Pension Funds 

524298 All Other Insurance Related Activities 

However, no current methodology is known to price industries such as Colleges and 

Universities (part of NAICS 611, Educational services). So possible difficult industries to 

price would be: 

2002 NAICS Code Industry Title 

611210 Junior Colleges 

611310 Colleges, Universities, and Professional Schools 

5. Should the US PPI program be reviewing PPI data from other countries to determine where 

critical gaps exist in the US industry indices? Since Canada and Mexico share the same 

classification system, should the US PPI be producing indices for the same industries or 

have the same detailed industry indices as these other countries? Should the same 

comparison occur with OECD or Eurostat countries? Would similar industries with similar 

structures facilitate international comparisons? 

Currently, Statistic Canada produces six services industry group indices. Five of the six 

service industry groups are also priced in the US. The sixth industry group that is not 

currently priced in the US would require pricing the following industries: 

2002 NAICS Code Industry Title 

541511 Custom Computer Programming Services 

541512 Computer Systems Design Services 

541513 Computer Facilities Management Services 

541519 Other Computer Related Services 

 

 78 
6. Should additional quantitative data be used to determine which mix of additional industries 

or additional detail for existing industries should be pursued? Possible measures to use 

would be the growth rate of industries. If industries where the PPI current produces indices 

are growing at a more rapid rate than industries which haven’t been surveyed by the PPI, 

would it be better to add additional indices to those growing industries? Another possible 

measure to use would be the change in the number of employees in an industry. If the 

number of employees in an industry is shrinking, does that indicate that the industry has less 

importance or would need fewer detailed industry indices? Conversely, if the number of 

employees are growing in an industry does that signify an increase in importance for an 

industry and therefore, additional indices are necessary to accurately represent that 

industry. 

The following chart shows the industries with future employment and salary growth. Four of 

these industries are currently priced in the PPI. 

Employment 

(in thousands) Change 

In PPI NAICS Industry 2004 2014 Number Percent 

61171 Educational support services, private 67.0 120.0 53.0 79.1 

X 62161 Home health care services 773.2 1,310.3 537.1 69.5 

X 51121 Software publishers 238.7 400.0 161.3 67.6 

X 54161 Management, scientific, and technical 

consulting services 779.0 1,250.2 471.2 60.5 

62331 Community care facilities for the elderly 582.6 902.1 319.5 54.8 

62149 Outpatient care centers, except mental health 

and substance abuse 298.4 447.4 149.0 49.9 

62142 Residential mental health and substance abuse 

facilities 154.0 230.8 76.8 49.9 

62139 Offices of all other health practitioners 71.7 107.0 35.3 49.3 

X 62321 Residential mental retardation facilities 337.1 496.7 159.6 47.3 

56121 Facilities support services 115.6 170.0 54.4 47.1 

 Source: BLS National Employment Matrix 

4.4 Concluding Remarks 

The expansion of the PPI coverage of the service-providing sector has been a significant and 

remarkable achievement. As it looks to the future, the PPI program plans to undertake an 

expansive review of the gaps that remain in its coverage of the U.S. economy, both in serviceproviding and goods-producing sectors. This paper has attempted to lay out the history of the 

PPI service sector expansion and some approaches that can be taken to address closing 

coverage gaps in the future. As this chapter has indicated, there are some clear alternative 

methods that can be used to develop data driven guidance in determining the priorities for future 

index development. However, the ultimate judgment and course that is taken will require 

substantial dialog with our statistical partners, the academic community, business, and policy 

users of our data. 

 

 79