![]() Hedonic regression models are estimated to determine the value of the utility derived from each of the characteristics that jointly constitute an item. The CPI obtains the value estimates used to adjust prices through the statistical technique known as regression analysis. In price index methodology, hedonic quality adjustment has come to mean the practice of decomposing an item into its constituent characteristics, obtaining estimates of the value of the utility derived from each characteristic, and using those value estimates to adjust prices when the quality of a good changes. The use of the word “hedonic” to describe this technique stems from the word’s Greek origin meaning “of or related to pleasure.” Economists approximate pleasure to the idea of utility – a measure of relative satisfaction from consumption of goods. Hedonic quality adjustment refers to a method of adjusting prices whenever the characteristics of the products included in the CPI change due to innovation or the introduction of completely new products. Hedonic quality adjustment is one of the techniques the CPI uses to account for changing product quality within some CPI item samples. ![]() While this method is sometimes acceptable, it biases the CPI if new version price changes are systematically different from the price changes of the unchanged goods. The traditional CPI solution to this problem is to temporarily remove an item from the sample when its quality has changed. To measure price change accurately, the CPI must be able to distinguish the portion of price change due to this quality change. This change in benefit is quality change. The new version of the item may provide additional benefits or, in some cases, reduced benefits. In many categories of items, this is the primary time when price change occurs. A fundamental problem for the goods and services in the CPI sample is that their characteristics, not just their prices, change over time as the retailers introduce new versions of items and discontinue the older versions. The CPI measures the average change in price over time of consumption goods and services by following the prices of a representative sample of consumption items in the retail establishments that sell them.
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