A Hedonic Model for Internet Access Service in the Consumer Price Index

Article excerpt

A hedonic model is presented for use in making direct quality adjustments to prices for Internet access service collected for the Consumer Price Index; the Box-Cox methodology for functional form selection improves the specification of the model

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. Experimental (1) 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.

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.

The U.S. Government's ARPANET is commonly cited as the beginning of what we now know as the Internet. The project that developed ARPANET started in the 1960s and provided much of the technological and physical infrastructure for the early Internet. In 1990, ARPANET shut down, and a National Science Foundation network took over where it left off. Taking the final steps to create the Internet, the National Science Foundation expanded the network to commercial traffic and privatized the Internet backbone in the 1990s.

The early Internet lacked a convenient interface. In 1990, researchers at the European Organization for Nuclear Research (Conseil Europeen pour la Recherche Nucleaire, or CERN) developed the World Wide Web, a hypertext-based graphical interface. The World Wide Web provided an easy way to display and organize information that resided on the Internet. With the 1993 introduction of Mosaic, the first popular Web browser, the Internet went mainstream. Many online service providers began including Internet access with their services, and Americans rapidly signed on for such access, mostly through dial-up connections.

In the late 1990s, Internet service providers began to offer high-speed cable and digital subscriber line (DSL) Internet access to consumers. Cable had a significant market share advantage at first, but, according to a May 2006 report by Pew/Internet, DSL has become the broadband access method of choice, with about 50 percent of the broadband market, compared with 41 percent for cable. (2) The same report states that 73 percent of Americans have Internet access in their homes and 42 percent of Americans have broadband Internet access.

Prior hedonic studies of Internet access

Several researchers have developed hedonic models for Internet access. Generally, these models either were focused on dial-up access or were based on a data set that consisted largely of observations on dial-up access. …