The Quality Bias in Price Indices

Abstract

One of our seemingly accepted conventional wisdoms is not fact, but at best hypothesis of questionable validity, supported essen? tially by intuition, and having only tentative empirical basis. The belief concerns nature of quality change and its bearing upon price indices. The conventional wisdom is replete in textbooks. Sichel and Eckstein, example, state that a price index, often ignores im? portant improvements in quality ... [p. 259] Reynolds holds that quality changes usually for [p. 122] and that to extent that such improvements are not allowed in our prices indexes, rise in price level is overstated . [p. 123] One inter? mediate text maintains that the usual measures of price level change tend to overstate price increases [Chambers, Scott, and Smith, p. 282] due to improved qualities. Dolan, in his recent addition to prin? ciples market, affirms that there is upward bias in price indices due to quality change, but notes that magnitude of bias cannot be de? termined, [p. 96] The texts by Baird [1973, p. 27], Miller [p. 152], Glahe [p. 12], Campbell and Campbell [p. 325] and several others1 suggest that quality change is better, but is ignored in price indices, claiming such measures contain an upward bias that exag? gerates price trends. [Campbell and Campbell, p. 325] A frequent illustration depicts rising cost of medical care and asks reader if it is justified to compare $2.00 office call of 1939 to 412.00 office call today ? [Glahe, p. 12]2 It is to be noted that there few texts which maintain that