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 service 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. A hedonic model for Internet access service in the Consumer Price Index