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

7. Treatment of Quality Change
ing a sample of prices collected as part of the standard
price collection for the Finish CPI, which has
some similarities to a PPI. Of the 83 spring prices,
only 55 matched comparisons could be made with
the summer prices, and of these, only 16 continued
through to the fall. They noted that the sample of
matched pairs became increasingly biased: of the
79 models in the fall, the 16 matched ones had a
mean processor speed of 518 MHz compared with
628 MHz for the remaining 63 unmatched ones;
the respective hard disk sizes were 10.2 gigobytes
(GB) and 15.0 GB; and the percentages of highend
processors (Pentium III and AMD Athlon)
were 25 percent and 49.2 percent, respectively.
Hardly any change in matched prices was found
over this six-month period, while a hedonic regression
analysis using all of the data found qualityadjusted
price falls of around 10 percent. Instructions
to respondents to hold on to models until
forced replacements are required may lead to a
sample increasingly unrepresentative of the population
and be biased toward technically inferior
variants. In this instance, the hedonic price
changes fell faster since the newer models became
cheaper for the services supplied.
7.165 Kokoski, Moulton, and Zieschang (1999)
used hedonic regressions in an empirical study of
inter-area price comparisons of food products
across U.S. urban areas using U.S. CPI data. They
found a negative sign on the coefficients of
dummy variables for whether or not the sample
products were from newly rotated samples
(dummy variable = 1) or samples before rotation
(dummy variable = 0). This indicated that qualityadjusted
prices were lower for the newly included
products compared with the quality-adjusted prices
of the old products.
7.166 Silver and Heravi (2002) found evidence
of sample degradation when matching prices of
U.K. washing machines over a year. By December,
only 53 percent of the January basket of model varieties
was used for the December/January index,
although this accounted for 81.6 percent of January
expenditure. Models of washing machines with
lower sales values dropped out quicker. However,
the remaining models in December accounted for
only 48.2 percent of the value of transactions in
December. The active sample relating to the universe
of transactions in December had substantially
deteriorated. The prices of unmatched and
matched models differed, as did their vintage and
quality. Even when prices were adjusted for quality
using hedonic regressions, prices of unmatched
old models were found to be lower than matched
ones; there was also evidence of higher prices for
unmatched new models. Quality-adjusted prices
fell faster for the matched sample than the full
sample: about 10 percent for the former compared
with about 7 percent for the latter. Residuals from
a common hedonic surface and their leverage were
also examined. The residuals from unmatched new
models were higher than matched ones, while residuals
from unmatched old models were much
lower. Unmatched observations had nearly twice
the (unweighted) leverage than matched ones; their
influence in the estimation of the parameters of the
regression equation was much greater and their exclusion
more serious.
7.167 These studies demonstrate how serious
sample degradation can occur and how unmatched
excluded products may be quite different from included
ones. Two procedures for dealing with such
situations will be considered: the use of hedonic
price indices instead of the partial hedonic patching
discussed above and chaining. Both rely on a
data set of a representative sample of products and
their characteristics in each period. A checklist of
structured product characteristics to be completed
each reporting period is one way changes in quality
characteristics can be prompted and monitored:
this is especially useful in high-technology industries
(Merkel, 2000). If a new product is introduced
and has or is likely to have substantial sales, then it
is included as a replacement or even an addition.
Its characteristics are marked off against a checklist
of salient characteristics. The list will be developed
when the sample is initiated and updated
as required. Alternatively, web pages and trade associations
may also be able to provide lists of
models and their prices; however, the need for
transaction prices as opposed to list prices is
stressed.
G.2 Hedonic price indices
7.168 It is important to distinguish between the
use of hedonic regressions to make adjustments for
quality differences when a noncomparable substitute
is used, as in Section E, and their use in their
own right as hedonic price indices, which are
measures of quality-adjusted price changes. Hedonic
price indices are suitable when the pace and
scale of replacements of products are substantial.
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