Adjusting VCR prices for quality change: a study using hedonic methods (EXCERPT), Monthly Labor Review Online, Sep. 1999

Adjusting VCR prices for quality change: a study using hedonic methods

Paul R. Liegey and Nicole Shepler

Are there any "low hanging fruit" (or benefits) to be harvested from the use of hedonic methods to quality-adjust video cassette recorder (VCR) prices?¹ According to the December 1996 Final Report of the Advisory Commission to Study the Consumer Price Index (CPI), an upward bias of 0.6 percent per year in the CPI is attributable to unmeasured quality change and new goods.² To estimate the biases attributed to quality change and new products, the advisory commission divided the CPI’s market basket (the set of all consumer goods and services) into 27 major categories. The category that contributed the most to the quality change bias estimate was the Appliances Including Consumer Electronics component. The Bureau of Labor Statistics responded to the advisory commission’s bias estimate acknowledging ". . . that [high-tech consumer goods] present particularly difficult measurement problems, but the quantitative evidence is very fragmentary and the BLS is reluctant to speculate as to what the magnitude of any bias component might be."³

In this study, the hedonic technique is used to estimate (implicit price) values for video cassette recorder (VCR) characteristics, and these estimates are used to quality-adjust VCR price changes when a new VCR model replaces an older model in the CPI sample. These adjusted VCR price changes are used to calculate a quality-adjusted price index. The resulting quality-adjusted index is, ideally, free of quality change bias. We compared it with the published CPI index to obtain an estimate of the quality change bias for VCRs.

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Footnotes
1 The phrase, "low hanging fruit," was first used in connection with the CPI by Matthew D. Shapiro and David W. Wilcox (1997), and conveys the notion of using superlative price indexes to calculate aggregate consumer price indexes that are (virtually) free of across strata "‘substitution"’ bias. See Mathew D. Shapiro and David W. Wilcox, "Alternative Strategies for Aggregating Prices in the CPI," Federal Reserve Back of St. Louis Review, May/June 1997, pp. 113–25. Substitution bias is the failure to adjust for changes in consumer behavior in response to relative price changes. Brent R. Moulton and Karin E. Moses (1997) used the phrase "low hanging fruit" to suggest how the application of hedonic quality adjustment methods for the appliances including consumer electronics component of the CPI may yield significant reductions in the ‘quality change’ bias. Quality change bias occurs when new models of an old product appear in the marketplace and have valuable improvements. See Brent R. Moulton and Karin E. Moses, "Addressing the Quality Change Issue in the Consumer Price Index," forthcoming in Brookings Papers on Economic Activity 1997, vol. 1.

2 U.S. Senate, Committee on Finance, "Final Report of the Advisory Commission to Study the Consumer Price Index," S. Prt. 104–72 (Washington, U.S. Government Printing Office, December 1996).

3 "Measurement Issues In The Consumer Price Index," Prepared Response for Jim Saxton, Chairman of the Joint Economic Committee (Bureau of Labor Statistics, June 1997).

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