Final answer:
Setting prices to capture customer savings from substitution is a pricing strategy. The Bureau of Labor Statistics uses complex methods to account for substitution and quality in the CPI, but these methods can be controversial. Businesses also grapple with whether to pass costs onto consumers, with price elasticity of demand playing a significant role.
Step-by-step explanation:
The practice of setting prices to capture some of the savings customers will experience by substituting a product for the one they currently use is a strategy involved in pricing decisions within a business. By the early 2000s, the Bureau of Labor Statistics (BLS) began using more complex mathematical methods for calculating the Consumer Price Index (CPI), which included allowing for substitution between goods. The BLS also aimed to measure and adjust for quality improvement in products like computers, considering characteristics such as speed, memory, and screen size. These adjustments are not always perfect and are a frequent source of debate among economists. Meanwhile, businesses must decide whether they can pass on costs of key inputs to consumers or if they need to absorb them due to market pressure. This decision is heavily influenced by the price elasticity of demand.