Producer Price Index Manual: Theory and Practice ... - METAC

Producer Price Index Manual
tionship may reflect the increasing or decreasing
utility to the scale of the provision. The characteristic
may be priced at a higher rate in up-market
models of the product versus down-market ones,
that is, β ≥ 1 in equation (7.21).
7.125 The similarity between the quantity adjustment
and the option cost approach can be identified
by simply considering Figure 7.1 with the z
characteristic being the option horizontal axis. The
similarity between the quantity adjustment and the
option cost approach is apparent because both relate
price to some dimension of quality: the size or
the option. The option cost approach can be extended
to more than one quality dimension. Both
approaches rely on the acquisition of estimates of
the change in price resulting from a change in the
options or size: the β slope estimates. In the case of
the quantity adjustment, this is taken from a product
identical to the one being replaced except for
the size. The β slope estimate in this case would be
perfectly identified from the two pieces of data. It
is as if changes in the other factors’ quality were
accounted for by the nature of the experiment; this
is done by comparing prices of what is essentially
the same thing except for change in quantity.
There may be, for example, two items that are
identical except for the possession of a single feature.
This allows the value of the feature to be determined.
Yet sometimes the worth of a feature or
option has to be extracted from a much larger data
set. This may be because the quality dimension
takes a relatively large range of possible numerical
values without an immediately obvious consistent
valuation. Consider the simple example of y one
feature varying in a product: processor speed in a
PC. It is not a straightforward matter to determine
the value of an additional unit of speed. To complicate
matters, there may be several quality dimensions
to the items, and not all combinations of
these may exist as items in the market in any one
period. Furthermore, the combinations existing in
the second period being compared may be quite
different than those in the first. All of this leads to
a more general framework.
Figure 7.1. Quality Adjustment for Different Sized Items
2.50
Price
2.00
1.50
1.00
5
3
3
∆ Size
∆ Price
0.50
β = ∆ Price / ∆ Size
0.00
0 0.25 0.5 0.75
Size in Kilograms
170