Price Indexes (9) Limited Use

In practice, the hedonic method is difficult to use, as statistically valid results are difficult to achieve. In general, the hedonic method has only been applied to cars, electronic good, and houses, because the different features are relative standard and a large sample of models are available in the market. Four important points should be noted.

1. A quality adjustment is only done when one product in the matched sample has to be changed. This will only be a small percentage of the total sample. Most products have remained unchanged for many years. For example, electricity, meat, milk, toilet soap, haircuts, bus travel have not changed much from when my grandfather purchased them.

2. Overlap Pricing is used in most situations where substitution is necessary. The only subjectivity is in deciding where Overlap Pricing is not possible, because both the old and new products are being sold in significant numbers.

3. The Hedonic Method is only used for products that need direct quality adjustment, so only a very small percentage of prices are adjusted this way. Some critics state that an hedonic adjustment is made to every price collected. This is a great exaggeration.

4. Hedonic adjustment may result in a smaller or larger adjustment than the traditional method. This means that the common complaint that hedonic adjustment method will reduce the increases in a price index is unfounded. The introduction of the hedonic method may actually increase the price index.

Given these four points it is hard to see what all the fuss is about.