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

7. Treatment of Quality Change
along with good data on markups and indirect
taxes in industries with stable technologies where
differences between the old and replacement products
are well specified and exhaustive, are reliable
by definition. The option cost approach is generally
preferable when old and new products differ
by easily identifiable characteristics that have once
been separately priced as options. The use of hedonic
regressions for partial patching is most appropriate
where data on price and characteristics
are available for a range of models and where the
characteristics are found to predict and explain
price variability well in terms of a priori reasoning
and econometrics. Use of hedonic regressions is
appropriate where the cost of an option or change
in characteristics cannot be separately identified
and has to be gleaned from the prices of products
sold with different specifications in the market.
The estimated regression coefficients are the estimate
of the contribution to price of a unit change
in a characteristic, having controlled for the effects
of variations in the quantities of other characteristics.
are available for a range of models and where
the characteristics are found to predict and explain
price variability well in terms of a priori reasoning
and econometrics. Use of hedonic regressions is
appropriate where the cost of an option or change
in characteristics cannot be separately identified
and has to be gleaned from the prices of products
sold with different specifications in the market.
The estimated regression coefficients are the estimate
of the contribution to price of a unit change
in a characteristic, having controlled for the effects
of variations in the quantities of other characteristics.are
available for a range of models and where
the characteristics are found to predict and explain
price variability well in terms of a priori reasoning
and econometrics. Use of hedonic regressions is
appropriate where the cost of an option or change
in characteristics cannot be separately identified
and has to be gleaned from the prices of products
sold with different specifications in the market.
The estimated regression coefficients are the estimate
of the contribution to price of a unit change
in a characteristic, having controlled for the effects
of variations in the quantities of other characteristics.
7.156 The estimates are particularly useful for
valuing changes in the quality of a product when
only a given set of characteristics change, and the
valuation is required for changes in these characteristics
only. The results from hedonic regressions
may be used to target the salient characteristics for
product selection. The synergy between the selection
of prices according to characteristics defined
as price determining by the hedonic regression and
the subsequent use hedonics for quality adjustment
should reap rewards. The method should be applied
where there are high ratios of noncomparable
replacements and where the differences between
the old and new products can be well defined by a
large number of characteristics.
7.157 If explicit estimates of quality are unavailable
and no replacement products are deemed appropriate,
then imputations may be used. The use
of imputations has much to commend it terms of
resources. It is relatively easy to employ, although
some verification of the validity of the implicit assumptions
might be appropriate. It requires no
judgment (unless targeted) and is therefore objective.
Targeted mean imputation is preferred to
overall mean imputation as long as the sample size
on which the target is based is adequate. Class
mean imputation is preferred when models at the
start of their life cycles are replacing those near the
end of their life cycle, although the approach requires
faith in the adequacy of the explicit and
comparable replacements being made.
7.158 Bias from using imputation is directly related
to the proportion of missing products and the
difference between quality-adjusted prices of
available matched products and the qualityadjusted
prices of unavailable ones (see Table 7.3).
The nature and extent of the bias depends on
whether short-run or long-run imputations are being
used (the former being preferred) and on market
conditions (see Section H below). Imputation
in practical terms produces the same result as deletion
of the product, and the inclusion of imputed
prices may give the illusion of larger sample sizes.
Imputation is less likely to give bias for products
where the proportion of missing prices is low. Table
7.2 can be used to estimate likely error margins
arising from its use, and a judgment can be made
as to whether they are acceptable. Its use across
many industries need not compound the errors
since, as noted in the discussion of this method, the
direction of bias need not be systematic. It is costeffective
for industries with large numbers of missing
products because of its ease of use. But the underlying
assumptions required must be carefully
considered if widely used. Imputation should by no
means be the overall, catchall strategy, and statisti-
181