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

Abstract

Paul R. Liegey and Nicole Shepler are economists in the Division of Consumer Prices and Price Indexes, Bureau of Labor Statistics. 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? 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. 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. Market basket includes VCRs