Hedonic pricing

Greening, L. A. Sanstad, A. H. and McMahon,]. E. (1997). Effects of Appliance Standards on Product Price and Attributes An Hedonic Pricing Model. Journal of Reguhtoiy Economics, 11(2) 181-194. 

Contingent Valuation Market Analysis Hedonic Pricing... 

The revealed preference method is an indirect approach that is used in order to monetize use values. This method observes the real choice between money and the environmental goods. Methods often include observations of consumers or producers behaviour or actions, such as the hedonic price method and the production function method. The hedonic price method determines values from actual market transactions. These transactions are used to see how the price of a market commodity varies when a related environmental good changes, such as the effects of noise or air pollution on house prices. The production function method is used to estimate the value of the environmental effects on production. This method is suitable when consumption or production of a private good is affected by the environmental good. An example is the valuation of ground-level ozone levels by valuing the impact on the production of wheat or timber, which has market prices. The problem with the revealed preference method is that it does not contain all the individuals values that affect the WTP. 

Another approach used in economic valuation is the hedonic pricing method. By this approach, economic valuation is obtained through estimating the direct effect of environmental impacts on market prices, usually housing prices. The hedonic pricing method is often used to estimate the economic value of more intangible damages due to air pollution, such as reduced visibility and aesthetics. 

Over the past half century, the held of economics has developed a rich and extensive literature that advances the theory and methodology of estimating values associated with the myriad unmarketed yet economically valuable benefits provided by nature. While the literature is vast, the number of approaches available to estimate the economic value of ecosystem services remains limited to only a handful, each with its own strengths and weaknesses (for comprehensive reviews, see Mitchell and Carson, 1989 Freeman, 1993 Smith, 2000 Mathis et al., 2003). These include replacement costs and avoided costs analysis, factor income analysis, hedonic pricing, contingent valuation, and travel costs analysis. A discussion of these approaches follows later in this section. Although there is often considerable debate about the methods used and the accuracy of the values derived, there is little doubt that the unpriced economic value of ecosystem services is enormous.9... 

We now also adopt the conventional hedonic hypothesis that the market price of a good is associated with a certain vector of characteristics. In the case of these herbicides, the hypothesis implies the existence of the following hedonic price function P(.) ... 

From equations (3.2), (3.4) and (3.5), we know that the systematic profits can be written as v= p M z, . . . , z , jc) - S,P(z,)h, - This chapter focuses on only one of this equation s components, the hedonic price function. This constitutes, however, only a first step towards a full estimation of equation (3.7), and it is far from obvious what procedure is the most appropriate to follow for a full estimation. This issue still remains to be settled, and should be the subject of further research. 

One possibility may be to have the profit function as a point of departure. This function relates prices of inputs and outputs to maximum profits (see, for example, Varian, 1992, pp. 40-5). This would suggest that an empirical version of v can be defined in terms of the maize price, the implicit prices (shadow prices) of herbicide characteristics, i.e. the derivatives of the hedonic price function with respect to each characteristic, and other input prices. In other words, the basis for the empirical version of v would be ... 

The cost criterion is of course related to the treatment price (PRICE), i.e. the dependent variable of the hedonic price function. PRICE comprises information on both the herbicide price per kilogram and the dose in kilograms per hectare, i.e. PRICE is measured in ITL 1 000 (kITL) per hectare. Annual price data were available for each treatment but, due to the mainly constant nature of the characteristics, PRICE was defined as the mean price of each kill rate period (1987-1988 and 1989-1994) for each treatment. See Table 3.2 for a statistical description of PRICE and the treatment characteristics. 

A basic version of the hedonic price function for maize herbicides P z was estimated by regressing PRICE on the four characteristics RELIA, PERSI, ACTION and TOX. A standard problem in such an estimation is that all characteristics of importance for herbicides price are not likely to be included. In this study, the most obvious examples are characteristics that... 

Table 3.2. Statistical description of the variables used in the hedonic price...

Table 3.3. OLS estimation results for the hedonic price functions ...

It was also checked whether any differences would arise when separate hedonic price functions are estimated for each of the eight years in the period of 1987-1994 (and for each of the specifications A, B and C). It is possible to develop this type of quite informal analysis into a formal analysis of pooling. A complication is that, in any event, the number of observations is small. We stick to the informal analysis here in order to obtain some rough indications of potential coefficient instability over time. Figures 3.2a and b show the results for these annual hedonic price... 

An obvious shortcoming with the analysis so far is that the supply side has not been considered explicitly. It is possible that it has been taken into account implicitly, since the four studied characteristics may be determinants not only for farmers treatment choices, but also for producers supply decisions. This complex issue is discussed in the last section. However, we now turn to study how the estimated hedonic price function is influenced by the introduction of some variables that are related explicitly to the supply of herbicides. 

It was noted above that the results for ACTION and RELIA correspond well to those reported by Beach and Carlson (1993). This is an encouraging fact, but this does not mean that the results are easy to interpret. Recall from the description of the model that it is typically difficult to interpret an estimated hedonic price function in terms of demand and supply. However,... 

Finally, the hedonic analysis in this chapter may provide a basis for a more advanced analysis of farmers selection of treatment alternatives and the prediction of future herbicide use. This presupposes, however, a successful combination of the hedonic model and the treatment selection model sketched earlier. As was noted on p. 53, thewayto accomplish such a combination has stiU to be studied carefully. Regional hedonic price functions may be necessary for estimations, and individual date on farmers treatment choices are desirable. 

See, for example, GrUlches (1971 1988) on the modern approach to hedonic price indexes. 

Court, A. T. (1939). Hedonic price indexes with automative examples. In The Dynamics of Automobile Demand, pp. 99-117. General Motors, NewYork. 

Cropper, M. L., Deck, L. B. and McConnell, K. E. (1988). On the choice of functional foimfoi hedonic price functions. Review of Economics and Statistics, 70,668-75. 

Epple, D. (1987). Hedonic prices and implicit markets estimating demand and supply functions for differentiated products./ournfl/o/Poh ft cfl/ conomy, 95,59-80. 

Griliches, Z. (1971). Introduction hedonic price indexes revisited. In Price Indexes and Quality Change Studies in New Methods of Measurement, ed. Z. GrUiches, pp. 3-15. Harvard University Press, Cambridge, MA. 

Rosen, S. (1974). Hedonic prices and implicit markets product differentiation in pure competition./oMma/of Political Economy, 82,34-55. 

Sdderqvist, T. (1991). Measuring the value of reduced health risks the hedonic price technique applied on the case of radon radiation. Unpublished research report, The Economic Research Institute at the Stockholm School of Economics. 

Rosen, Sherwin. 1974. Hedonic Prices and Im idt Markets Product Differentiation in Pure Competition. Journal of Political Economy. January/February, 82(1) 34-55. 

The SLCC may also include externalities or external costs as defined by environmental economics and external costs which are usually borne by society as shown in Fig. 2. Such costs can be assessed using the preference theory of economic valuatirMi methods (e.g., hedonic pricing and contingent valuation) that are based on the market and nonmarket values (e.g., the willingness-to-pay survey) (Rebitzer and Hunkeler 2003). 

Epple, D. (1987). "Hedonic Prices and Implicit Markets Estimating Supply and Demand Functions for Differentiated Products," Journal of Political Economy 95(1) 59-80. 

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