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July 2008, Vol. 131, No. 7
A hedonic model for Internet access service in the Consumer Price Index
The practice of making hedonic-based price adjustments to remove the effects of quality changes in goods and services that enter into the calculation of the U.S. Consumer Price Index (CPI) has to date focused primarily on indexes for consumer electronics, appliances, housing, and apparel. In an effort to expand the use of hedonic adjustments to a service-oriented area of the CPI, this article investigates the development and application of a hedonic regression model for making direct price adjustments for quality change in the index for Internet access services (known as “Internet services and electronic information providers,” item index SEEE03). The analysis presented builds on past research in hedonics and makes use of a Box-Cox regression to select a functional form that allows for better estimation than that produced by standard functional forms. Experimental1 price indexes are constructed with hedonic regression coefficients to make direct adjustments to CPI price quotes in order to account for changes in characteristics of Internet serv-ice access, such as improved bandwidth and length of service contract. These experimental indexes are compared with the official index for Internet access service to measure the impact of hedonic-based quality adjustments on the CPI index SEEE03.
The Internet access industry
The first commercial services allowing users to access content with their personal computers by connecting to interhousehold networks appeared in 1979 with the debut of CompuServe and The Source, an online service provider bought by Reader’s Digest soon after the service was launched. The same year also marked the beginning of Usenet, a newsgroup and messaging network. Early online services proliferated during the 1980s, and each allowed users to access a limited network, but not the Internet.
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1 The BLS uses the term “experimental” to denote statistics produced outside the regular production systems used for “official” statistics. The experimental indexes are not considered to be of the same quality as the official indexes.
Related BLS programs
Consumer Price Index
Item replacement and quality change in apparel price indexes.—Dec. 2006.
Adjusting VCR prices for quality change. — Sep. 1999.
Apparel price indexes: effects of hedonic adjustment.—May 1994.
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