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

7. Treatment of Quality Change
vide valuable information on the extent to which
different characteristics influence price variation.
This in turn can help in the selection of replacement
products. The enhanced confidence in product
substitution and the quality adjustment of
prices from the hedonic approach with its parallel
reduction in reliance on linking, have been cited as
significant benefits in the reliability of the measurement
of price changes for apparel in the United
States’ CPI (Reinsdorf, Liegey, and Stewart,
1996). The results from hedonic regressions have a
role to play in identifying price-determining characteristics
and may be useful in the design of quality
checklists in price collection (Chapter 6).
F. Choosing a Quality-
Adjustment Method
7.152 Choosing a method for quality adjusting
prices is not straightforward. The analyst must
consider the technology and market for each commodity
and devise appropriate methods. This is not
to say the methods selected for one industry will
be independent of those selected for other industries.
Expertise built up using one method may encourage
its use elsewhere, and intensive use of resources
for one commodity may lead to less resource-intensive
methods in others. The methods
adopted for individual industries may vary among
countries as access to data, relationships with the
respondents, resources, expertise and features of
the production, and market for the product vary.
Guidelines on choosing a method arise directly
from the features of the methods outlined above. A
good understanding of the methods and their implicit
and explicit assumptions is essential when
choosing a method.
7.153 Consider Figure 7.3, which provides a
useful guide to the decision-making process. Assume
the matched models method is being used. If
the product is matched for repricing—without a
change in the specification—no quality adjustment
is required. This is the simplest of procedures.
However, a caveat applies. If the product belongs
to a high-technology industry where model replacement
is rapid, the matched sample may become
unrepresentative of the universe of transactions.
Alternatively, matching may be under a
chained framework, where prices of products in a
period are matched to those in the preceding period
to form a link. A series of successive links of
matched comparisons combined by successive
multiplication makes up the chained matched index.
Alternatively, hedonic indices may be used,
which require no matching. The use of such methods
is discussed in Section G. At the very least, attention
should be directed to more regular product
resampling. Continued long-run matching would
deplete the sample, and an alternative framework
to long-run matching would be required.
7.154 Consider a change in the quality of a
product, and assume a replacement product is
available. The selection of a comparable product to
the same specification and the use of its price as a
comparable replacement require that none of the
price difference is due to quality. They also require
confidence that all price-determining factors are
included on the specification. The replacement
product should also be representative and account
for a reasonable proportion of sales. Caution is required
when near obsolete products at the end of
their life cycles are replaced with unusual pricing
by similar products that account for relatively low
sales, or with products that have quite substantial
sales but are at different points in their cycle.
Strategies for ameliorating such effects are discussed
below and in Chapter 8, including early
substitutions before pricing strategies become dissimilar.
7.155 Figure 7.3 shows where quality differences
can be quantified. Explicit estimates are generally
considered to be more reliable, but they are
also more resource intensive (at least initially).
Once an appropriate methodology has been developed,
explicit estimates can often be easily replicated.
General guidelines are more difficult here as
the choice depends on the host of factors discussed
above, which are likely to make the estimates more
reliable in each situation. Central to all of this is
the quality of the data on which the estimates are
based. If reliable data are unavailable, subjective
judgments may be used. Product differences are
often quite technical and very difficult to specify
and quantify. The reliability of the method depends
on the knowledge of the experts and the variance
in opinions. Estimates based on objective data are
thus preferred. Good production cost estimates,
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