Quality-adjusted Price Indexes Research Articles

Consumer price measurement under the first wave of the COVID-19 spread in Japan: Scanner data evidence for retailers in Tokyo

In this paper, we examine the CPI (consumer price index) measurement errors under the first wave of the COVID-19 spread in Japan. To address this question, we construct high-frequency quality-adjusted price indices by employing daily scanner data from retail stores in Tokyo. We demonstrate the importance of using price data with the wide-ranging coverage of products and outlets by making explicit adjustments for temporary sales effects and retail service quality in examining the retail price dynamics under the COVID-19 pandemic as the voluntary lockdown constrained household purchasing behavior. Note that the sources of the CPI measurement errors under the COVID-19 pandemic differ significantly from those in the US, observed as wide-ranging and long-lasting stockouts. We show that downward bias, not upward bias generally advocated, was observed during the first wave of the COVID-19 spread in Japan. The magnitude of the downward bias is estimated at from −0.6 to −0.3 points on the CPI for food less perishables and eating out on the basis of cumulative changes from January 2020 to June. The contribution of the estimates to the overall CPI is −0.3% to −0.15% points on an annualized basis, considering that the estimation covers half-year and the weights are about a quarter of the overall CPI. The magnitude of measurement errors is deemed limited, and the overall trend of the CPI remains unchanged even after incorporating the estimated downward bias. It should be noted that this downward bias arises mainly from the “one-specification-for-one-item” policy by weakening the price representativeness in the Japanese CPI.

A systematic examination of quality-adjusted price index alternatives for medical care using claims data

We investigate alternative methods for constructing quality-adjusted medical price indexes both theoretically and empirically using medical claims data. The methodology and assumptions applied in the formation of the index have substantive effects on the magnitude of the quality-adjusted price changes. A method based on utility theory produces the most robust and accurate results, while alternative methods used in recent work overstate inflation. Based on Medicare claims data for three medical conditions, we find declining prices across each condition when properly adjusted for quality.

Price Indices and the Value of Innovation with Heterogenous Patients

Many countries use uniform cost-effectiveness criteria to determine whether to adopt a new medical technology for the entire population. This approach assumes homogeneous preferences for expected health benefits and side effects. We examine whether new prescription drugs generate welfare gains when accounting for heterogeneous preferences by constructing quality-adjusted price indices in the market for colorectal cancer drug treatments. We find that while the efficacy gains from newer drugs do not justify high prices for the population as a whole, innovation improves the welfare of sicker, late-stage cancer patients. A uniform evaluation criterion would not permit these innovations despite welfare gains to a subpopulation.

Improving productivity measures of producing transportation infrastructure using quality-adjusted price indices

Productivity measures are based on either physical or revenue-based measures of output. Revenue based measures require the use of a price index. In this paper we propose an approach to generate a quality-adjusted producer price index for the production of roadways. We use price data for highway projects across the contiguous United States from 2005 through 2017. The data set includes approximately 5000 unique items for each project. These items are distilled to form 60 “item baskets”. We redefine our output from being lane-miles to ‘lane-miles of service’. The indicator of quality is the deterioration rate of a roadway, which is measured using data on pavement roughness that links to deterioration and the time between required servicing; an improvement in quality reduces deterioration and increases the time span between maintenance and rebuilding. We use a chained-Fisher price index and find that our proposed, quality-adjusted producer price index exhibits 1.7 percent lower annual growth than the unadjusted price index. Given price inflation has been overestimated in the past by failing to account for quality changes, our finding suggests the lack of productivity growth in producing roads, bridges and infrastructure, may have been significantly underestimated.

Measuring the Impact of ICT-driven Product and Process Innovation on the Korean Economy

ABSTRACT This study analyses the impact of information and communication technology (ICT)-driven product and process innovation on productivity and economic output growth at the sectoral level in Korea. A traditional growth accounting framework is applied with a quality-adjusted price index on ICT capital and ICT intermediate goods. In the productivity analysis, the impact of ICT-driven process innovation weakens over time in both the manufacturing and service sectors. In the economic output growth analysis, ICT-driven product innovation largely influences the ICT producing manufacturing sector, and national economic growth has benefited from ICT-driven product innovation almost four times as much as from ICT-driven process innovation during 2000–2012.

A Systematic Examination of Quality-Adjusted Price Index Alternatives for Medical Care Using Claims Data

A Systematic Examination of Quality-Adjusted Price Index Alternatives for Medical Care Using Claims Data

Moore's law and price trends of digital products: the case of smartphones

ABSTRACTSince the introduction of the iPhone by Apple in 2007 and Google's Android platform in 2009, the two systems have accounted for a total of 90% of the U.S. smartphone market. Apple, however, reaps most of the profit in the industry. In the second quarter of 2016, for example, Apple's iPhone gets 104% of the sector's profit. This suggests that the smartphone market resembles a Stackelberg leadership model. Despite Apple's strong market power, we investigate if the market leader is under pressure to be price competitive. We calculate a quality-adjusted price index for smartphones from 2007 to 2016. Our results show that the average price declines at an average rate of over 27% per year. The price trend is similar to other digit products such as computers, cameras, and portable music players. We observe that the large price decline reflects the effect of Moore's law, which predicts that the capacity of integrated circuits undergoes an exponential growth. The effect of Moore's law is incorporated into the Stackelberg model. We also observe that price trends of other digital products also follow a similar pattern. This suggest that the long-run price trends of digital consumer goods are somewhat independent of the market structures.

Quality-adjusted international price comparisons of mobile telecommunications services

Many countries' policymakers have conducted international price comparisons of mobile telecommunications services to prevent service operators from overcharging subscribers. However, those comparisons have become more complicated because of the escalation in service usage and telecommunications expenditures spurred by the proliferation of smartphones and broadband LTE wireless internet service networks. The basket-based methodologies that have been widely used for international price comparisons are also limited—first, because the baskets for comparison may not be representative of actual service usage patterns in some countries; second, because they are difficult to apply to highly differentiated service plans due to the significant increase in wireless internet service usage and widely used plans with unlimited voice call service and SMS/MMS; and third, because they cannot consider the quality of service, such as upload and download speed in various service environments, at all. As an alternative, this paper proposes a hedonic pricing model that accounts for service quality and its variation in potentially disruptive environments, as well as fixed charge for a mobile phone additional to the price of service plans. The model was used to derive quality-adjusted price indices of mobile telecommunications services for twelve cities in ten countries with broadband LTE wireless internet service. The empirical results confirmed that the price index of each city varied significantly across the specifications,—both within the United States and internationally—depending on whether the model was constructed to reflect service quality and its variation on roads, in buildings, and in subways. The price index of each city also varied depending on whether the subsidized price of a mobile phone was considered part of the monthly price of a service plan. These results have important implications for policymakers seeking to understand the ultimate level of mobile telecommunication service prices for their country in a global context.

Contestability in the Digital Music Player Market

We test the concept of contestability in the digital music player market. The theory suggests that the threat of new entrants keeps firms’ market power in check. But Baumol and others argue that pure contestable markets rarely happen in reality. The portable music player market has been dominated by one producer. We estimate a quality-adjusted price index from 2002 to 2010. Results show that market prices decline at an average rate of about 20 percent per year, which is similar to other IT products. This provides support for the idea that the market is fairly contestable.

Combining micro and macro data in hedonic price indexes

This paper proposes arithmetic and geometric Paasche quality-adjusted price indexes that combine micro data from the base period with macro data on the averages of asset prices and characteristics at the index period. The suggested indexes have two types of advantages relative to traditional Paasche indexes: (i) simplification and cost reduction of data acquisition and manipulation; and (ii) potentially greater efficiency and robustness to sampling problems. A Monte Carlo simulation study and an empirical application concerning the housing market illustrate some of those advantages.

Adjusting the Measurement of the Output of the Medical Sector for Quality: A Review of the Literature.

The Bureau of Economic Analysis recently created new price indexes for health care in its health care satellite account and now faces the problem of how to adjust them for quality. I review the literature on this topic and divide the articles that created quality-adjusted price indexes for individual medical conditions into those that use primarily outcomes-based adjustments and those that use only process-based adjustments. Outcomes-based adjustments adjust the indexes based on observed aggregate health outcomes, usually mortality. Process-based adjustments adjust the indexes based on the treatments provided and medical knowledge of their effectiveness. Outcomes-based adjustments are easier to implement, while process-based adjustments are more demanding in terms of data and medical knowledge. In general, the research literature shows adjusting for quality in the measurement of output in the medical sector to be quantitatively important.

The FEWS Index: Fixed Effects with a Window Splice

Abstract This article describes the estimation of quality-adjusted price indexes from ‘big data’ such as scanner and online data when there is no available information on product characteristics for explicit quality adjustment using hedonic regression. The longitudinal information can be exploited to implicitly quality-adjust the price indexes. The fixed-effects (or ‘time-product dummy’) index is shown to be equivalent to a fully interacted time-dummy hedonic index based on all price-determining characteristics of the products, despite those characteristics not being observed. In production, this can be combined with a modified approach to splicing that incorporates the price movement across the full estimation window to reflect new products with one period’s lag without requiring revision. Empirical results for this fixed-effects window-splice (FEWS) index are presented for different data sources: three years of New Zealand consumer electronics scanner data from market-research company GfK; six years of United States supermarket scanner data from market-research company IRI; and 15 months of New Zealand consumer electronics daily online data from MIT’s Billion Prices Project.

The Multi-Sectoral Thirlwall’s Law: evidence from 14 developed European countries using product-level data

The paper reports estimates of import and export functions for five technological sectors in 14 developed European countries. These functions have never before been estimated for developed countries adopting a technological classification of sectors. The paper compares estimates of income elasticities found using vector error-correction models employing aggregate deflators, with estimates found using cross-product panels employing product-specific quality-adjusted price indexes recently calculated by Feenstra and Romalis. The results indicate that the income elasticities of imports and exports are higher for medium- and high-tech manufactures, which suggests the importance of moving from the production of simple goods to the production of goods with high technological content. The estimates also suggest that the Multi-Sectoral Thirlwall’s Law holds for the countries analysed, while comparing the estimates revealed that cross-product panels with quality-adjusted prices generate considerably more robust results. The investigation reveals that using a more recent time period generates estimates of income elasticities of demand for primary products and resource-based manufactures that tend to be higher than the estimates found by studies that have used longer time periods, while the opposite holds for low-, medium-, and high-tech manufactures.

Contestability in the Digital Music Player Market

We test the concept of contestability in the digital music player market. The theory suggests that the threat of new entrants keeps firms' market power in check. But Baumol and others argue that pure contestable markets rarely happen in reality. The portable music player market has been dominated by one producer. We estimate a quality-adjusted price index from 2002 to 2010. Results show that market prices decline at an average rate of about 20 percent per year, which is similar to other IT products. This provides support for the idea that the market is fairly contestable.

An investigation of hedonic methods applicability to analyzing prices of various groups of durable goods

The paper summarizes empirical research finalizing the first stage of the scientific project aimed at hedonic methods application in adjusting price indices in cases when variability in quality of goods is observed. A hedonic model describes the price of the heterogeneous good by a set of its relevant attributes, and thus it can be helpful in distinguishing the price change level resulting from quality-related and other than quality-related causes. As a consequence, hedonic methods provide a group of potential solutions to the problem of measuring a socalled “true price change” by introducing quality-adjusted price indices. However, beforehand a reliable, stable and predictively powerful hedonic model must be constructed and estimated. The main goals of the presented research were: 1) to test whether the initially chosen goods are convenient for hedonic analyses; 2) to estimate and verify the hedonic models suitable for further analyses for goods selected in the first step. The empirical research was based on a database consisting of seventeen groups of durable goods (household appliances, consumer electronics and ICT/IT devices).

Age effects, unobserved characteristics and hedonic price indexes: The Spanish car market in the 1990s

This paper computes and compares alternative quality-adjusted price indexes for new cars in Spain in the period 1990–2000. The proposed hedonic approach simultaneously controls for time-invariant unobserved product effects and age effects, that can be interpreted as a proxy for time-variant unobservables. The results show that the non-adjusted price index largely overstates the increase in the cost of living induced by changes in car prices and that the previous evidence for this market has not measured the real extent of that bias, probably due to the omission of controls for unobservables. It is also shown that omitting age effects can lead to misleading conclusions. In particular, their omission would imply that the year-on-year Spanish Consumer Price Index would have been overestimated by around \(0.1~\%\) on average during the sample period. Excluding both the controls for age effects and time-invariant unobservables would have increased this bias to \(0.2~\%\). The estimated price indexes give also some insights on what could have been the determinants of price evolution in the Spanish car market.

International Prices and Endogenous Quality *

Abstract The unit values of internationally traded goods are heavily influenced by quality. We model this in an extended monopolistic competition framework where, in addition to choosing price, firms simultaneously choose quality subject to nonhomothetic demand. We estimate quality and quality-adjusted price indexes for 185 countries over 1984–2011. Our estimates are less sensitive to assumptions about the extensive margin of firms than are purely “demand-side” estimates. We find that quality-adjusted prices vary much less across countries than do unit values and, surprisingly, the quality-adjusted terms of trade are negatively related to countries’ level of income.

Comment on “Product Downsizing and Hidden Price Increases: Evidence from Japan's Deflationary Period”

economies. To my limited knowledge as a former practitioner of monetary policy, Imai and Watanabe are the first to show that Japan’s prices behave differently from those in the USA, in two ways. First, although mostly focused on supermarket items, Imai and Watanabe are able to show that deflation in the CPI for this category in the past several years is in fact associated with quality downgrades, so that the quality-adjusted prices did not fall as much as the official CPI suggested. Although there are methodological differences between this paper (using the geometric average of prices) and the CPI (using a consumption-basket weighted average of “representative” products’ prices), Imai and Watanabe’s price index “declined by about 16% in 2000‐2012, with the rate of deflation per year being 1.3%,which is comparable to the figures for the corresponding items in the official CPI.” In contrast, the corresponding quality-adjusted price index (per-unit price taking account of downsizing) fell far less than the unadjusted price index and the corresponding CPI component. This suggests a downward bias in the official CPI component. Second, this downward bias is not inconsequential because Japanese consumers base their consumption on quality-adjusted prices, not the quality-unadjusted price tags. Failure to recognize this downward bias may lead to a false assessment of inflationary dynamics. In fact, Japanese consumers are keenly aware that downsizing implies an increasing price, in a sharp contrast with their American counterparts, who tend to be more sensitive to the price tag (quality-unadjusted price) than the per unit price (quality-adjusted price). To put this differently, Japanese consumers are more rational (in an economic sense) than the US consumers studied by Gourville and Koehler (2004). Moreover, the Japanese consumers seem more to be more than simply rational: the majority of Japanese consumers appreciate upsizing and detest downsizing independently of the per-unit price. This may be interpreted as an appreciation of these firms’

Dynamics of Quality Improvement in US Broadband Networks: An Exploratory Study

This very preliminary paper is concerned with measurement of broadband quality, making use of a unique, rich new data source that allows us to directly measure the evolution of many dimensions of broadband quality over the period 2011-2012. Its primary focus is on measuring broadband speed (bandwidth), widely perceived as the most important dimension of broadband quality. My principal conclusion is that average download speed delivered by U.S. ISPs, within speed tiers, increased at an average annualized rate of 5 to 7 percent over the spring 2011-spring 2012 period. This quality increase captures only the effects of improvements in delivered speed within speed tiers, and excludes upgrades to speed tiers for customers on existing service plans that may have been given gratis to existing customers, as well as purchase of new and more expensive plans by customers opting to switch to higher speed plans. For the purposes of quantifying quality improvement relevant to calculation of a quality-adjusted broadband price index, then, this would be a lower bound on the extent to which faster download speeds were a characteristic tracking improved quality in existing broadband plans. Taking this quality improvement into account seems likely to result in rates of quality-adjusted price decline significantly greater than previous estimates of changes in quality-adjusted U.S. broadband prices. Using as our proxy for quality-adjusted price decline the nominal service price divided by download speed (a measure popularized by the OECD and others), a flat nominal price divided by a five to 7 percent faster speed results in a 5 to 7 percent annual rate of quality-adjusted price decline. While unimpressive when juxtaposed with the historical record in semiconductors or computers, this is still double or triple the rate suggested by earlier studies. In addition, the analysis has shown that variation in speed from hour to hour within a single day is roughly 5-6 times greater than variation from day of the week to day of the week, at a given hour. Several state holidays have a small but highly statistically significant negative impact on net speed. Weekends, and not weekdays, seem to be the new “prime time” for internet speed slowdowns. This may ratify the claim that the internet has evolved from being primarily a platform for scientists, engineers, and techies, to an intra-business communication and networking platform, to an infrastructure that today, generates traffic whose ebbs and flows are now dominated by consumers.

Measuring innovations in the Japanese LCD TVs using market data

Quality-adjusted price indexes based on a discrete choice model and a weighted hedonic function are estimated using market data for Liquid Crystal Display (LCD) TVs obtained from a large Internet price comparison service in Japan. Implicit values of attributes were used to unify marginal values of attributes into a scalar quality measure, and thus, we measure innovations by the price shift while controlling the levels of the attributes. We also report estimates on welfare gains through the discrete choice approach.