Differences in quality and differences in price
10.15 The physical and other characteristics to be taken into consideration when identifying products constitute differences in quality and play an important role, while at the same time raising difficult statistical problems.
The fact is that for many goods and services intended for a specific purpose there exist several varieties of differing qualities, each with its own price.
10.16 Differences in quality are reflected by the following factors:
With given physical characteristics, the differences in the other factors imply that the physical units are not identical in an economic sense, and that the value differs amongst the units. These differences in unit values are considered to be differences in volume and not as differences in price.
In reality, the payment made when a good is purchased covers not only the price of a good but also the price of the services associated with the supply of goods. This means that in principle identical goods sold at different prices and in different circumstances should be considered to be different products. This conclusion is explicitly acknowledged in the supply and use tables, where the value of trade and transport margins (which represent the main services associated with the provision of goods) is recorded separately.
10.17 Within a given market and in a single period, the coexistence of several unit values can, except in the cases described in paragraph 10.19. be considered as evidence of the existence of quality differences. Accordingly, the various models of cars and even different versions of the same model must be treated as different products similarly, a distinction must be made between first-class and second-class railway journeys.
For the purposes of calculating price and volume measures, it is necessary to use as a detailed product classification as possible so that each product identified has maximum homogeneity, regardless of the level of detail used in the presentation of results.
10.18 The dimension of quality has to be taken into account also when changes over time are to be recorded. The change in quality due, for example, to the modification of the physical characteristics of a product must be considered to be a change in volume and not in price. Also the effects of aggregation have to be considered. Variations in the composition of a flow which imply, for example, a shift in favour of higher average quality have to be recorded as a volume increase and not as a price increase. It follows that for outputs, the effect of shifts between markets with differing prices, e.g. domestic versus external, or industrial uses versus markets for consumer products, will be treated as changes in volume and not as changes in price. It also follows that a price change for a given flow can occur only as result of changes in prices at the level of individual transactions.
10.19 Definition:
The existence of observed unit value differences is not to be considered as an indicator of differences in quality when the following circumstances apply, namely lack of information, price discrimination reflecting limitations in freedom of choice and the existence of parallel markets. In these cases, the unit value differences are considered as differences in price.
10.20 Lack of information means that purchasers may not always be properly informed about existing price differences and may therefore inadvertently buy at higher prices. This, or the opposite, may occur also in situations where individual buyers and sellers negotiate or bargain over the price. On the other hand, the difference between the average price of a good purchased in a market or a bazaar, where such bargaining often occurs, and the price of the same good sold in a different type of retail outlet, such as a department store, should normally be treated as reflecting differences in quality due to different sales conditions.
10.21 Price discrimination implies that sellers may be in a position to charge different prices to different categories of purchasers for identical goods and services sold under exactly the same circumstances. In these cases, there is no or limited freedom of choice on the part of a purchaser belonging to a special category. The principle adopted is that variations in price are to be regarded as price discrimination when different prices are charged for identical units sold under exactly the same circumstances in a clearly separable market. Price variations due to such discrimination do not constitute differences in volume.
The possibility of the retrading of goods in a given market implies that price discrimination for these types of products in most cases can be assumed to be insignificant. The price differences that may exist for goods can normally be interpreted as due to lack of information or to the existence of parallel markets.
In service industries, e.g. in transportation, producers may charge lower prices to groups of individuals with typically lower incomes, such as pensioners or students. If these are free to travel at whatever time they choose, this must be treated as a price discrimination. However, if they are charged lower fares on condition that they travel only at certain times, typically off-peak times, they are being offered lower-quality transportation.
10.22 Parallel markets may exist for several reasons. Buyers may be unable to buy as much as they would like at a lower price because there is insufficient supply available at that price, and a secondary, parallel market, where higher prices are quoted, may exist. There is also the possibility that a parallel market exists, where sellers can charge lower prices because they can avoid certain taxes. In these cases too, a price variation constitutes a difference in price and not in volume.
10.23 A change in the structure of a flow affecting its total value may occur when in the circumstances of lack of information, price discrimination and the existence of parallel markets identical products are sold at different prices.
Suppose that a certain quantity of a particular good or service is sold at a lower price to a particular category of purchasers without any difference whatever in the nature of the good or service offered, location, timing or conditions of sale, or other factors. A subsequent decrease in the proportion sold at the lower price raises the average price paid by purchasers of the good or service. This must be recorded as a price and not a volume increase.