Quality Change and Price Indexes Comments by Ellen Dulberger Brookings Workshop on Economic Measurement, February 1, 2001 Second Session Hedonic Price Indexes: Too fast? Too slow? Or Just Right?

Agenda Insights from IBM/BEA price indexes for computing equipment Comments on NRC panel's recommendations (Chapter 4)

IBM/BEA Price Indexes 4 types of computing equipment (See tables below) –Processors, DASD, Printers, Displays Alternative price indexes –Matched model, Composite, Characteristics, Regression Comparisons –Matched model indexes showed much smaller price declines for all types of equipment –Other 3 showed price declines which were much more like each other for all types of equipment

Key Insights From IBM/BEA Research Difference between matched model and other indexes indicated multiple price regimes –Price changes associated with models for which prices are estimated in one period are NOT the same as price changes for models existing in both periods –If the price changes were the same, the two indexes would not move differently Multiple price regimes raise important questions –Sample representativeness Quantities AND Price changes? Implications for aggregation? –Use hedonics to test for multiple price regimes? If one price regime in each period, don't need hedonics to estimate missing prices. It's okay to assume same changes in quality adjusted prices for old and new models If multiple price regimes, hedonics are needed and require special care in using

Key Insights From IBM/BEA Research Characteristics indexes have a lot of intuitive appeal, however –Inappropriate selection of characteristics results in biased characteristics' coefficients –Depending on the specification, coefficients may or may not be characteristics' prices. However, they are used to calculate the estimates of the prices –How do we handle multiple price regimes? Keep "on the line." Maintain distance from "the line"? –In the case of computer processors, coefficients were biased when technology classes were not accounted for –BTW--characteristics' coefficients can remain constant, yet characteristics prices change Regression indexes are problematic (I agree) –Problem of weights –Specification errors –Choices in how to handle It's very important to have product and technology expertise from the beginning! –I couldn't disagree more with "computers are easy"

Comments on the NRC Panel's Recommendations 4-1 Conduct random experiments –Why? Hedonics are so hard, focus on problems or suspects first –Better to give high priority to hedonics in areas undergoing biggest change 4-2 Expand testing of Hedonics beyond price adjustment –OK, but this seems minor in importance relative to new products problem 4-3 Cautious integration of hedonics –This recommendation relates to the importance of a CPI program which allows for historical revisions –The stability issue is important. Single year regressions may be problematic (Single year vs. multi-year regressions tested for computer processors. Could not reject hypothesis that single years were from the same population as multi-year) 4-4 Avoid dummies –Can't argue with that! – Again, main problem is specification error

Comments on the NRC Panel's Recommendations 4-5 Pursue characteristics price indexes –Proper specification is hard for many reasons including... Selection of characteristics Possibility of multiple price regimes –Coefficients must be positive (value to buyers and costly to produce) –Characteristics prices can't go to zero 4-6 Study indirect method –OK, but the really problem is understanding the product and the market 4-7 Congress should provide incremental resources –There's a bigger issue here: potential to restructure program. National vs. Local prices Scanners free up field agent resources Skills transition 4-8 Independent advisory panel –Not likely to work. Need more than outside review. Need outside input early

Recommendations the NRC panel didn't make.... Explore the use of hedonics for direct comparison of quality of items in different strata –important to focus on value in use –related to questions of classification hierarchy Explore the use of hedonics to develop user cost for durable goods Investigate differences associated with frequency (monthly vs. quarterly vs. annual)

Summary Hedonics help us deal with multiple price regimes and other problems beyond those discussed in the NRC report Product and technology expertise is required early in the research process