Hedonic pricing and quality change

Yes, your cell phone does more stuff now than it used to, and that change belongs in the GDP deflator. But your customer-service experience is much worse than it used to be. That change also belongs in the GDP deflator.

A reflection on Mike’s piece below:

In computing economic growth and changes in the cost of living, it’s necessary to adjust for changes in product quality. Most of the changes actually incorporated into those measures tend to be product improvements. As far as I know, the sheer screaming frustration of being put in voice-mail jail rather than dealing with a live human being about a service problem has never been treated as a negative quality change. That tends to over-estimate standard-of-living gains and make cost-of-living adjustments too small.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com

18 thoughts on “Hedonic pricing and quality change”

  1. Product quality and longevity also ought to be considered in the GDP deflator. My fridge, laptop, washer, and oven (to name four) are all more efficient and capable than comparable products years ago, but all of them are also much more flimsily built, harder and/or impossible to repair, and likely won’t last as long as comparable products from years ago.

    That fridges are more energy efficient than they were ten years ago is a consumer boon, but the reality that they fall apart after five years rather than last a lifetime is a very strong negative. Indeed, a modern fridge is probably more expensive to own because reduced operating costs will not offset their shorter useful lives.

  2. I am too young to have worn out a refrigerator. I only remember my parents buying a new one; the old one was small and inefficient, not broken. Really, i can only think of shoes and cars as durable good which I have to fix or replace with any frequency. Maybe you just party too hard?

  3. @ Curmudgeon
    I would like to see evidence of your claims. White goods are bought sufficiently rarely, and perhaps are treated sufficiently differently in different households, that I don’t think anecdotes are a very useful guide to their longevity.

    And I don’t know WHAT these mythical laptops you’re talking about from earlier times are that worked so well. Across a common brand (in my case Apple) I’ve bought, god, maybe ten or more laptops over the past twenty years (for friends as well as myself). I’ve noticed no pattern along the lines you claim. Mostly the devices work well for as long as is reasonable (which, for a laptop which is carried around every day, I’d consider to be about three to four years). I have one that is still working well after ten years.
    Most die either because
    – the battery became ever less usable. A big problem with laptops ten years ago, but one I never see today with Apple’s modern non-replacable batteries. I’ve seen the blog whining about this, but I’ve never encountered it in real life, including in other devices like iPods and iPhones, and clearly Apple doesn’t think it’s an issue of any importance either.
    – the hard drive dies. Again this seems to have been more common in the past, with modern hard drives sporting MEMS acceleration sensors that seem to do an OK job of detecting dangerous accelerations. The move to solid state storage makes this failure mode obsolete (though of course it has been replaced with this year’s idiotic “Apple sucks” meme, that SSDs are all going to die after a year of use, replacing the previous “sealed batteries are all going to die after a year of use” meme.)
    – and one should be careful about dismissing these failures as worse than they are. Of course, if you buy a laptop for mobility, these failures make the device unusable. But if the failure occurs after four years, in many situations the laptop can be switched to some other use — driven off permanent power and an external USB hard drive, placed at a desk and given to a kid, or to a parent, and used as a media PC or a home server. This is in contrast to the failure of, say a fridge, which leaves you with a metal box with few other uses — though I guess for some it makes a nice closet.

    Now, if the laptops you buy are of the PC $400 variety, I don’t know. Perhaps it is true that a $400 laptop bought today lasts only a year, and the $1200 laptop you were buying in 2007 lasted 3 years. The race to the bottom in PC-land has produced some real horror stories. But even then, I suspect things are not as dire as you claim; and that if you were to buy, say, at the $1000 level rather than at the $400 level, you’d receive the lifetime you always received. Certainly in my rough experience following the tech world in real life and in blogs, I see many complaints about laptops and other PCs, of all stripes — but drastically diminished lifespan compared to the good old days is not one of them.

  4. Nope, “white” goods, specifically refrigerators do not last as long as in the past. My folks had the same fridge for over thirty years and it worked fine the whole time, until they moved and got a new one.

    My grandparents had the same fridge for over forty years, I got it and only got a new one (after using it for over ten years) when the power company offered a big rebate to encourage more energy efficient appliance use. That new fridge lasted ten years. Several repair guys assured me that it was not worth fixing due to low long-term reliability. So, I got a new one (which uses way less power and keeps food fresher so is better that way). I expect I’ll be lucky to get ten years out of this one.

    All were the same brand, Kenmore.

    I recall a Consumer Reports story on the declining overall lifetime of fridges. You could look it up.

    Lots of gismos on new fridges, but, they just don’t last.

  5. @H
    Uhh, can you give more of a reference than “I recall a Consumer Reports story on the declining overall lifetime of fridges. You could look it up.”?

    I did a variety of searches related to the expected lives of fridges. These give numbers from 14 to 17 years (and “lifetime” includes devices that are abandoned for whatever reason, but which still worked). What I did not find anywhere is what this number used to be in the “good old days”.

    Look, simply claiming that something is true is not good enough. The reason we see cathedrals built 800 years ago is not because “they built so much better back then”, it’s because all the non-cathedral stuff they built back then fell down, or burned up, or was replaced. If we want to talk anecdotes, my anecdote is that, in my entire life, from birth till today, I have never had a fridge fail on me or my family, or had a friend tell me they had a fridge fail. Make of that what you will.

    Maybe fridges nowadays last just as long as they used to. Maybe they don’t, but it’s a reasonable tradeoff because they’re so much more efficient that the overall dollar cost and resource cost is better. Maybe people move more frequently than they used to, so they’re never IN one house long enough to tell us these stories about long-lived appliances. Maybe poor people (buying low-end brands without features) don’t get to share anecdotes about appliance lifetime with rich people (buying high end brands with tons of features). Maybe it’s because, duh, anybody who bough a refrigerator in the last ten years is not in a position to pipe up telling us how it has lasted for 40 years.
    I don’t know, but I’ll be damned if I’m going to believe a claim based on nothing other than that it panders to a sort of universal harking for some mythical golden age. I’ve heard enough of this crap in the context of items I use all the time (eg how razor blades are supposedly so much worse than they used to be) that I have a very low tolerance for it without evidence.

  6. @MH:
    I can assure you that what H is saying is what appliance repairmen say. It’s anecdotal evidence, to be sure, but they will nearly all tell you that modern major appliances are less reliable and not nearly as likely to be worth fixing when they break. Have observed this with washer/dryers.

  7. I have no idea about whether appliances last longer, but cars certainly do, even ignoring the occasional black-plate geriatricmobile we see tooling around California. This may be only because rustproofing has improved, but lots of maintenance intervals like spark plug changes and oil changes have become much longer. Of course no-one wants a refrigerator per se; we want cubic feet-hours of cold space per (initial cost plus repairs plus electricity cost), maybe corrected for convenient shelves and drawers and such. Consumer reports tries to provide a sense at least of this quotient, which would be the really useful criterion of choice.

  8. What about the total cost of ownership, considering the cost of electricity as well as the cost of purchase and maintenance? And of course, the cost of scrapping it as well.

  9. I can assure you that what H is saying is what appliance repairmen say. It’s anecdotal evidence, to be sure, but they will nearly all tell you that modern major appliances are less reliable and not nearly as likely to be worth fixing when they break. Have observed this with washer/dryers.

    I hate to keep flogging the point, but bad logic irritates me.
    How exactly do these appliance repairmen know this “fact”? What is the time scale we are talking about here? I assume 30 years or so. So what is the assumed chain of events? Billy gets into the appliance repair business 30 years ago. He spends the first twenty years doing no work whatsoever (because everything is so reliable), then he starts working?
    I posit that, rationally, Billy did just as much work 30 years ago as he did now. If anything has changed, it would be that there would be more appliance repairmen now (and more as a fraction of the population) to cope with our supposedly increasingly breaking down appliances. And how would Billy know what fraction of the labor force are appliance repair men? Through his contacts at the BEA?

    WHAT I suspect is happening is precisely the sort of stupidity that, if it were raised in the context of politics, would be treated by contempt by the readers of this blog:
    Some days Billy repairs fridges that are 30 years old. His comment: “they don’t make them like they used to”. Based on what? This is EXACTLY like my statement re cathedrals that are still standing after 900 years. The only 30 yr fridges Billy sees are the (possibly rare) ones that haven’t yet died or been thrown away.
    Other days Billy repairs fridges that are 5 years old. His comment: “modern fridges are such junk”. Based on what? Does he know the age distribution of fridges in the US, and is thus in a position to calculate the fraction of bad fridges that fail?
    All Billy ever sees is broken fridges, most of which are modern since most of the fridges in America are modern (population growth, new houses, people just want new models, etc).

  10. Maynard has a point about illusion and urban legends. A lot of people will tell you that they don’t make pianos like they used to, and a fifty- or a hundred-year old Steinway is better than a new one. But concert pianists can play any piano they want, know from pianos, and they always play new instruments. Come to think of it, pianists are better, across the board, technically and it’s not at all clear that Schnabel and Horowitz played with some sort of ineffable greater insight than the best of the current crop.

  11. At the age of 60 I just bought the first new fridge in my life two weeks ago. I was forced to buy new due to size constriction in my kitchen. The old one came with the house and was of 1960s vintage. It was way small, inefficiant and had of late started running a lot and making sounds indicative of gastric distress. With all that I can testify that I’ve never had a fridge die on me and never owned one that was not second hand, ancient and free.
    I’m just a poor role model as a consumer. I’m now typing this on a 7 year old computer. It works just fine. When I bought my TV I went into the store and asked, “What is the cheapest TV you have?” That one was too small so I settled for the second cheapest. It too works just fine. My car is 8 years old and aside from a recent front end repair, works just fine.
    It is by fervent hope that my refridgerator will be the last one I ever need to aquire and will outlive me so it too can end up with some other cheap SOB like myself who will pass it on to someone else when he decides to move too far away to feel it is worth moving it because refridgerators can be had for free any time you need one.
    As I said, I’m just a lousy consumer.

  12. The microwave oven I bought in 1983 still works just fine. The color TV I bought in 1986 lasted almost 20 years.

  13. The piano thing is not relevant. Concert halls and piano players are paid by piano companies (via free or low cost instruments) to use their new pianos. That’s why the programs at many halls identify Steinway or some other brand as the “Official Piano” of, say, Disney Hall.

  14. I sympathize with the desire to apply a quality-decrease adjustment for “customer service” departments. The absolute worst was when I spent an hour with the inane music waiting for a hospital billing department, only to find that they hadn’t bothered to try to bill my insurance, and once the phone rep pushed the right button the charge went through with no problem (sigh…).

    The other area I’d like to apply an adjustment to is air travel. Yes, inflation-adjusted air fares have fallen since deregulation, but seat pitch (i.e., leg room) is smaller, planes are on average more packed (it’s been a while since I’ve been on a plane with more than a couple of empty seats leaving the gate), and the number of flight attendants has been reduced to the FAA minimum. Never mind the lack of meals, I’d kind of rather bring on a decent sandwich from the terminal (although I am paying for it rather than receiving a meal as part of the ticket price).

    The only appliance that’s ever died on me is a dishwasher built in 1972 (just guessing because that’s when the house was built) that crapped out after 12 years.

    As far as cars go, yes if you live in CA, OR, or WA, you will see 50 year old cars in daily use because cars in that part of the country don’t rust. In most of the rest of the country, cars of that vintage (or younger, up through the 70’s) rusted enough after 10 or so years that they were junked long ago (unless they’re something special that someone decided to take care of and only drive on summer weekends). Since the 70’s, cars have both better acceleration and better gas mileage (we can discuss whether the balance between the two has been the right one), run right (cars from the 70’sjust didn’t run right from the time they left the factory), meet stricter emissions standards, and meet much tougher safety standards. Whatever quality-improvement adjustments have been applied (and I believe it’s cost-based for safety equipment, emissions equipment, and equipment levels (e.g., standard air conditioning, FM radio, etc.)), it doesn’t adjust for the softer stuff (engine doesn’t infuriate you, transmission doesn’t grenade inside four years).

  15. BTW, in my small corner of a major auto company a decade ago, we have to actually clean out our files, and the warranty analyst looked at the paperwork from the 1980’s (lots of Weibull plots). The warranty period had increased from 1 year to 3 years, and the total repair percentage decreased by a factor of 3 in that time, so we had a 10-fold reduction in failure rates.

  16. In general, it’s easier to design something to last much longer and be easier to repair if you’re willing to trade off efficiency. The requirements for seals and moving parts and so forth are much less exacting. And the closer you cut things, the more difficult to repair in the field. 30 years ago a repair person could have rebuilt a compressor; today they don’t have the tools or the parts.

    I think there’s also something instructive about looking at the case of automobiles. Ever since the 70s, the trend (initially led by japanese carmakers) has been to ever-more-inclusive warranties that cover essentially the expected first-owner life of a car. And to prepaid service plans that put the risk of unexpected findings on the dealership. So you have all the incentives for keeping repair costs low aimed at the people who have control (by improvements in design and implementation) over those costs. For other major durables with shorter warranty periods, the cost of unrepairability is externalized, with predictable results.

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