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

Producer Price Index Manual
cal agencies are advised against its use as a default
device without due consideration to the nature of
the markets, possibility of targeting the imputation,
and the viability of estimates from the sample sizes
involved if such targeting is employed.
7.159 If the old and replacement products are
available simultaneously and the quality difference
cannot be quantified, an implicit approach can be
used whereby the price difference between the old
and replacement product in a period in which they
both exist is assumed to be due to quality. This
overlap method, by replacing the old product with
a new one, takes the ratio of prices in a period to
be a measure of their quality difference. It is implicitly
used when new samples of products are
taken. The assumption of relative prices equating
to quality differences at the time of the splice is
unlikely to hold true if the old and replacement
products are at different stages in their life cycle
and different pricing strategies are used at these
stages. For example, there may be deep discounting
of the old product to clear inventories and price
skimming of market segments that will purchase
new models at relatively high prices. As with
comparable replacements, early substitutions are
advised so that the overlap is at a time when products
are at similar stages in their life cycles.
7.160 The use of the linked to show no change
method and the carry forward method are not generally
advised for making quality adjustment imputations
for the reasons discussed unless there is
deemed to be some validity to the implicit assumptions.
G. High-Technology and Other
Sectors with Rapid Turnover of
Models
7.161 The measurement of price changes of
products unaffected by quality changes is primarily
achieved by matching models, the aforementioned
techniques being applicable when the matching
breaks down. But what about industries where the
matching breaks down on a regular basis because
of the high turnover in new models of different
qualities than the old ones The matching of prices
of identical models over time, by its nature, is
likely to lead to a depleted sample. There is both a
dynamic universe of all products produced and a
static universe of the products selected for repricing
(Dalén, 1998). For example, if the sample is
initiated in December, by the subsequent May the
static universe will be matching prices of those
products available in the static universe in both
December and May but will omit the unmatched
new products introduced in January, February,
March, April, and May, and the unmatched old
ones available in December but unavailable in
May. There are two empirical questions to answer
for any significant bias to be detected. First,
whether the sample depletion is substantial; such
depletion is a necessary condition for bias. Second,
whether the unmatched new and unmatched old
products are likely to have different qualityadjusted
prices versus the matched ones in the current
and base period.
7.162 Thus, the matching of prices of identical
models over time may lead to the monitoring of a
sample of models increasingly unrepresentative of
the population of transactions. There are old models
that existed when the sample was drawn but are
not available in the current period, and there are
new ones coming into the current period that are
not available in the base period. It may be that the
departures have relatively low prices and the entrants
relatively high ones and that by ignoring
these prices a bias is being introduced. Using old
low-priced products and ignoring new high-priced
ones has the affect of biasing the index downward.
In some industries, the new product may be introduced
at a relatively low price and the old one may
become obsolete at a relatively high one, serving a
minority segment of the market (Berndt, Ling, and
Kyle, 2003). In this case, the bias would take the
opposite direction, the nature of the bias depends
on the pricing strategies of firms for new and old
products.
7.163 This sampling bias exists for most products.
However, our concern is with product markets
where the statistical agencies are finding the
frequency of new product introductions and old
product obsolescence sufficiently high that they
may have little confidence in their results. First,
some examples of such product markets will be
given. Then two procedures will be considered: the
use of hedonic price indices instead of partial hedonic
patching and chaining.
G.1 Some examples
7.164 Koskimäki and Vartia (2001) attempted to
match prices of personal computers over three
two-month periods (spring, summer, and fall) us-
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