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Price Differentials Across Outlets in CPI Data, 2002-2007. John Greenlees Robert McClelland May 15, 2008. New Outlets Bias. New Outlets Bias can arise from the failure of the CPI to adequately reflect the gains to consumers from the appearance of new types of product outlets

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price differentials across outlets in cpi data 2002 2007

Price Differentials Across Outlets in CPI Data, 2002-2007

John Greenlees

Robert McClelland

May 15, 2008

new outlets bias
New Outlets Bias
  • New Outlets Bias can arise from the failure of the CPI to adequately reflect the gains to consumers from the appearance of new types of product outlets
  • These welfare gains can arise from:
    • Greater convenience (e.g., Internet shopping)
    • Greater product variety (e.g., Tuscan restaurants)
    • Lower prices (e.g., Wal-Mart, Costco)
  • This paper focuses only on the lower-price effect
price effects of new outlets
Price Effects of New Outlets
  • The CPI does not reflect differences in prices between products at different sample outlets
    • Differences across outlets are implicitly treated as entirely reflecting quality differentials
  • Currently, the most interest concerns the low prices offered at discount department stores like WalMart and warehouses and club stores like Costco
empirical studies
Empirical Studies

New Outlets Bias is a long-recognized issue

  • Hoover and Stotz (1964)
  • Reinsdorf (1993)
  • White (2000)
  • Hausman and Leibtag (2004, 2005)
empirical approach
Empirical Approach
  • Use CPI Research Database for 2002-2007
  • Select relatively, but not completely, homogeneous CPI food item categories
  • Regress price on item characteristics, with dummies for time and for outlet fixed effects
  • Estimate changes in average outlet premium or discount, and average item quality, over time
  • Decompose outlet effects within and across outlet categories
key advantages of our approach
Key Advantages of Our Approach
  • Uses actual CPI microdata
  • Uses regression estimation to incorporate variations in item characteristics
  • Examines outlet differentials in general, not just across pre-specified outlet categories
  • Analyzes item quality change, not just outlet effects
  • Compares hedonic to matched-model approach
cpi sample
CPI Sample
  • 14 Food ELIs corresponding to categories used earlier by Reinsdorf and Hausman/Leibtag
    • Some more homogeneous than others
  • 69 months from January 2002 through September 2007
  • About 8,000 outlets
  • About 16,000 “quote strings”
  • About 360,000 price quotes
hedonic regression models
Hedonic Regression Models
  • We estimate 14 regressions, one for each of our item categories
  • Dependent variable is lnPijt, the log-price of item i in outlet j in time t.
  • RHS variables include item characteristics, outlet fixed effects, and dummies for month
  • Regressions yield a monthly price index for each item category with January 2002=100.
overall results
Overall Results

Outlet effect = -0.26 percent/year

Item characteristics effect

= +0.20 percent/year

Difference between hedonic and matched-model index

= -0.25 percent/year

conclusions 1
Conclusions (1)
  • We find significant new outlet effects
    • Averaging -0.26 percent per year
    • Lowering prices for 10 of 14 items
    • This result is after adjusting for differences in item characteristics across outlets
    • Remember, some of these effects may be due to differences in outlet quality
conclusions 2
Conclusions (2)
  • Most of the outlet effects do not arise from growth in the discount department store category
    • Warehouse category growth is also important
    • About 1/3 of total outlet effect comes from changes in average outlet premiums within categories
conclusions 3
Conclusions (3)
  • We also identify large effects of changes in item characteristics
    • Even within our relatively homogeneous item categories
    • Hedonic model estimates average quality increase at 0.20 percent per year
    • Differences between hedonic and matched model estimates warrant further study of how CPI adjusts for quality