Outlet/Customer biases occur because the transactions in the elementary aggregates are generally fixed to specific suppliers and/or specific customers. In an input price index, bias occurs when the price index does not detect when purchasers shift from higher cost suppliers to lower cost suppliers for the same product. In an output price index, bias arises when the index does not detect when producers practise price discrimination and shift the sales from customers with lower prices to customers who pay higher prices for the same product.
The bias that arises due to change in supplier or customer is mitigated in several ways in the Producer and International Trade Price Indexes. For the Input to the Manufacturing Industries Producer Price Index, prices are generally observed by surveying the purchaser. If the purchaser changes supplier (and pays a lower price) then this is detected in the quarterly Survey of Producer Prices and, after being adjusted for any appropriate quality changes, appears as a movement in the price index. Similarly, for the output price indexes, prices are generally observed by surveying the producer, and any price rises resulting from changes to new customers will similarly appear in the price indexes. Much but not all of the risk of bias is mitigated by this approach to sample selection.
There are two situations where potential biases can arise.
The first is in the Input to House Construction Producer Price Index. This input price index measures prices paid by builders by surveying the businesses supplying the products rather than the builders themselves. This practise is far more practical and efficient than attempting to survey a sample of individual builders. However, one drawback to this approach is that this price index becomes susceptible to outlet (supplier) substitution bias. For example, if builders begin purchasing from a chain wholesaler outside the sample that offers materials at substantial discount, the price index would exhibit an upward bias.
The second case where biases arise is where counterpart pricing is utilised. Counterpart pricing is a term used to reflect using a transaction price observed on a pricing basis that differs from the conceptual base of the price index. For example, within the manufacturing price indexes, some suppliers provide the prices they receive for their products and these are included in the input price index. Aside from the appropriateness of the underlying assumptions regarding distributive trade margins, this practise also has the potential to introduce outlet substitution bias, since it does not always detect when purchasers change their point of supply (at lower prices). A similar issue arises when purchasers provide prices for incorporation into an output index (although in this case the bias is more suitably termed ‘customer substitution’).
Regardless of where such practises occur, the potential for bias is mitigated through index reviews and sample maintenance reviews. As detailed above, such reviews measure expenditure and revenue for different products and involve consultation, both with industry bodies and producers themselves. Regular activity of this kind detects changes in sales or purchasing markets and allows price indexes to be updated to reflect the shift in the quantities and revenue/expenditure.