Replacements, Quality adjustments and Sales Prices Jörgen Dalén Oxana Tarassiouk
Background to paper • First version was a report commissioned by Statistics Sweden for proposing alternatives to its currently most used quality adjustment (QA) method: direct valuation by the price collectors. • Report presented to CPI Board (Indexnämnden) of Statistics Sweden in October 2012 • Slightly revised, tables updated, summarizing section added for more general discussion • This version to be presented at Ottawa Group meeting in Copenhagen, May 1-3, 2013
Currently (2012) used QA/replacement methods • Price collectors estimate the value of a quality difference at replacements • Used for most CPI goods (not services) • Monthly chaining and re-sampling • Used for computers and mobile phones • Various explicit adjustments for cars (+ motor cycles and boats) • Option prices • Judgemental adjustment by central • Deletion of non-matching product offers for daily necessities and alcohol • Effectively using only product offers available from previous December
QA in the presence of sales prices • Immediately realised that QA problem in practice is intertwined with the pattern of sales prices • Analytical tool: Product offer life= the series of prices for a certain product in a certain outlet • Very often a product offer life ends with a sales/reduced price after which a new product offer comes in with a high price • What is the right quality adjustment between a product on a sales price and a new product offer?
Sales prices and price reductions Stylized example Month 0 1 2 3 4 5 6 Price 195 195 195 99 99 225 225 • One could generalise this example to call it a regular price-sales price-replacement ( rsr ) cycle. • The reason that this pattern creates great problems for price measurement is its asymmetrical nature . • Price decreases typically occur within the life-time of one product offer but the price increase occurs at the replacement. • Two examples – Table 2 and 3
Table 2: Example of price observations in one outlet 2010-2012, curtain (cloth)
Table 3: Example of price observations in one outlet 2010-2011, large TV Raw price change= 6990/17632=39.6 %
Implicit quality indexes APC IQI = API • APC = change in average prices • API = Actual price index (CPI numbers) • Shows the quality change that is implied by the methods and procedures used in the index • IQI>100 means quality increase. Almost all IQI in Table 4>100 • Question: Is it reasonable to assume that quality has increased for all products? • Back to Tables 2 and 3 • Price collectors normally attribute part of price increase to quality change
IQI Table Product group 2010, 2010, 2011, 2011, 2012, 2012, actua bridged actual bridged actual bridged l overlap overlap overlap Furniture 100.5 100.9 100.9 103.3 100.8 102.4 Household textiles 104.5 115.5 103.7 122.0 101.0 120.9 Household appliances 101.0 108.3 105.8 106.5 103.2 105.4 Household equipment 103.9 110.8 103.9 109.9 100.1 98.0 Tools for home and garden 104.5 107.8 104.4 103.5 101.6 102.4 Recreational goods 102.2 112.7 100.9 108.5 103.8 109.1 Home electronics 107.7 113.0 111.8 114.2 111.0 119.1 Large TVs 111.0 117.1 113.7 115.3 111.5 116.2 Digital cameras 97.8 100.1 110.9 112.1 121.0 147.4 DVD players 107.2 114.8 106.6 113.1 111.3 117.2
Comments on IQI Table • Almost all IQI>100 – implies quality improvement (or underestimating bias …) • Bridged overlap increases IQI, often by a lot. • Since the price increase at replacement is eliminated and replaced by averages of other movements, often small,
Table 5 – product offer live spans P r o d u c t M o n t h s P r o d u c t M o n t h s P r o d u c t M o n t h s P l a t e 1 2 . 9 F l o w e r , p l a n t 1 5 .7 V i d e o c a m e r a 4 . 8 C o ff e e c u p 1 0 . 8 S k i e q u i p m e n t 3 . 8 A u d i o 6 . 0 s y s t e m s G l a s s 1 0 . 7 S p o r t e q u i p m e n t 7 . 5 H o m e c i n e m a 6 . 1 s y s t e m E a t i n g k n i f e 1 9 . 2 O u t d o o r 1 0 .4 C D r a d i o 6 . 0 re c r e a t i o n e q u i p m e n t S a u c e p an 1 4 . 2 T o y 1 1 .6 M P 3 p l a y e r 6 . 8 K i t c h e n k n i f e 1 7 . 2 K i t c h e n t ab l e 1 5 .5 G a m e c o n s o l e 9 . 0 K i t c h e n s c al e 1 4 . 4 U n u p h o l s t e re d 1 4 .4 D i g i t a l 5 . 9 c h a i r c a m e r a S a l a d b o w l 1 2 . 7 U p h o l s t e re d 1 4 .3 C o m p u t er 3 . 5 c h a i r B a b y c ar r i a g e 1 1 . 8 B e d 1 6 .9 M o b i l e p h o n e 5 . 6 B a b y c ar s e a t 1 7 . 2 C e i l i n g l a m p 1 4 .3 W as h i n g 6 . 0 m a c h i n e B a g , c a s e , 6 . 6 A rm c h a i r 1 5 .5 D i s h w a s h e r 7 . 0 p u rs e T o w e l 1 3 . 5 S o f a 1 3 .0 V a c u u m 7 . 4 c l e a n e r D u v et c o v e r 9 . 7 S h e l f , c ab i n et 1 7 .0 R e f r i g e r a t o r 6 . 3 s e t C u rt a i n 1 0 . 0 C a r p e t 1 2 .8 M i c r o w a v e 8 . 9 (c l o t h ) o v e n Q u i l t 1 4 . 0 M a t t re s s 2 3 .2 C o f fe e m a k e r 9 . 6 C a r t y r e 1 5 . 3 M i rr o r 1 6 .9 W at e r b o i l e r 9 . 0 C a r a c c e s s o r y 2 0 . 2 T V , s m a l l 4 . 3 W at c h 1 9 .0 B i c y c l e 1 1 . 0 T V , l a r g e 4 . 3 J e w e l l e r y 2 0 .8 M u s i c a l 1 1 . 6 D V D p l a y e r 5 . 2 i n s t ru m e n t
Product offer lives • Most POs live about a year in the CPI (Table 5) • PO for home electronics live only 4-6 months
Table 6 (part) Group/ product group Rsr, pure price Pure price increase Other patterns (w = weight, n = total number of lives) decrease Median Median Median price price price change per change per change per % month % month % month Household equipment ≈ 1 Plate (w = 0.69, n = 346) 8.7, 22 0.92, 0.99 9.4 1.01 59.9 ≈ 1 Coffee cup (w = 0.74, n = 205) 13.6, 6.6 0.91, 0.98 8.7 1.01 71.2 ≈ 1 Glass (w = 0.67, n = 59) 7.1, 7.3 0.82, 0.97 29.2 1.01 56.3 ≈ 1 Eating knife (w = 0.34, n = 27) 4.2, 7.3 0.91, 0.99 23.5 1.01 64.9 ≈ 1 Saucepan (w = 1.06, n = 97) 7.1, 6.2 0.97, 0.99 17.0 1.00 69.7 ≈ 1 Kitchen knife (w = 1.06, n = 77) 7.4, 17 0.95, 0.99 18.0 1.01 57.6 ≈ 1 Kitchen scale (w = 1.06, n = 82) 0.4, 0.0 0.95, . 14.2 1.01 85.3 ≈ 1 Plastic food container (w = 1.06, n = 103) 1.2, 12.9 0.96, 1.00 26.5 1.01 59.4 ≈ 1 Salad bowl (w = 1.06, n = 78) 5.5, 0.0 0.94, . 38.7 1.01 55.7 Other personal goods ≈ 1 Baby carriage (w = 0.31, n = 193) 15.9, 10.1 0.98, 0.99 38.8 1.00 35.2 ≈ 1 Baby car seat (w = 0.32, n = 94) 7.3, 5.5 0.97, 0.99 45.1 1.00 42.1 ≈ 1 Bag, case, purse (w = 1.92, n = 388) 12.3, 3.5 0.89, 0.97 20.9 1.01 63.2 Household textiles ≈ 1 Towel (w = 0.41, n = 305) 18.3, 16.5 0.94, 0.99 22.9 1.01 42.2 ≈ 1 Duvet cover set (w = 1.15, n = 526) 26.2, 4.6 0.93, 0.96 9.4 1.02 59.8 ≈ 1 Curtain (cloth) (w = 2.89, n = 548) 20.6, 7.1 0.9, 0.98 20.5 1.01 51.8 ≈ 1 Quilt (w = 1.19, n = 171) 13.6, 4.2 0.98, 0.98 30.8 1.01 51.3
Table 6 • Different types of product lives • Rsr = regular price-sales price-replacement • Pure price decrease ( ≈ rsr) • Pure price increase • Others (one month, no price change ...) • Most product offer lives involve no price change at all or very small ones. Price change essentially estimated from the first three types of lives and from the replacements between two lives. • For high-tech products, the price decreases far outnumber the increases. • For other products the patterns are more mixed and in most cases price increases are more numerous than decreases. • But price decreases tend to be larger than price increases
How to interpret results? • Normal market assumptions: • For traditional products no or small quality change on average • Still IQI>100 in most cases • For high-tech products there is real quality change • But how big and how rapid? • Look at Tables 7 and 8 for actual results • Rather extreme index movements • Sweden extreme in Europe for home electronics • Swedish krona stronger • Cut-throat competion in Swedish market • But could this explain everything??
Results from present methods Mcr Price collector valuation Compute DVD- Coicop TV, large TV, small rs player 09.1 2010 53,1 55,3 64,0 72,8 70,8 2011 54,9 61,0 60,6 72,7 70,8 2012, July 62,1 66,4 68,0 72,9 73,8 2010- 2012, July 18,1 22,4 26,4 38,6 37,0 • Extreme results for TVs!
International comparison from 2005) • Table 8: Sweden in extreme low end in a European context 09.1.1 Equipment for the reception. recording and reproduction of sound and 09.1 Audio-visual. photographic and pictures information processing equipment HICP Country HICP (2005=100) Country (2005=100) Sweden 27.6 Sweden 40.3 France 37.4 Estonia 44.0 Czech Republic 39.4 Ireland 45.5 Estonia 39.6 Spain 46.0 Belgium 43.7 Latvia 46.8 Latvia 41.8 Czech Republic 47.6 Slovakia 42.3 Switzerland 47.6
Conclusion • Risk for downward CPI bias apparent • New methodology needed! • Two main methods proposed: • Direct price comparison (no quality adjustment) for most products • Monthly chaining and replacement for high-tech products
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