Effects of Extreme Values on Price Indexes: The Case of the Air Travel Price Index

TLDR: In this article, the authors examined the effect of extreme price values on the Fisher and Toernqvist index formulas and concluded that the relative robustness of the two indexes is improved by using Taylor series approximations.

Abstract: This paper examines the effects of extreme price values on the Fisher and Toernqvist index formulas. Using a simple model, the paper first considers the impact of outliers on the unweighted arithmetic, harmonic, and geometric means of a collection of values. Then, under the same model, the effect of a single extremely high or low price on the price index formulas (weighted means) is investigated. Further investigation using Taylor series approximations leads to some general conclusions regarding the relative robustness of the Fisher and Toernqvist indexes. These are illustrated with empirical results based on airfare data from the U.S. Department of Transportation's Origin and Destination Survey.