Such product characteristics represent not only value to the user but also resource cost to the producer. In hedonic regression, independent variables typically include performance-related product and service attributes. In working with longitudinal data, one adds period-specific dummies and uses their regression coefficients to estimate quality-adjusted price indices. Hedonic price regression models are estimated using secondary data on prices and attributes of different product or service alternatives. In empirical studies, these implicit characteristic prices are coefficients that relate prices and attributes in a regression model. 3 Application of the hedonic pricing methodĪlthough product characteristics are neither produced nor consumed in isolation, hedonic price models assume that the price of a product reflects embodied characteristics valued by some implicit or shadow prices.2 Hedonic models and real estate valuation.Price changes that are due to substitution effects are subject to hedonic quality adjustments.
Hedonic regression is also used in consumer price index (CPI) calculations, where it is used to control for the effects of changes in product quality. Hedonic models are commonly used in real estate appraisal and real estate economics, as houses have a variety of easily-measured traits (Such as the number of rooms, overall size, or distance from certain amenities) which make them more amenable to hedonic regression models than most other goods. As also possible in regression models, Hedonic regression models can accommodate non-linearity, variable interaction, or other more complex valuation approaches. Hedonic regression models are most commonly estimated using regression analysis, where the overall price of the good is treated as the dependent variable and the characteristics of the good become the explanatory variables (typically dummy coded or linear coefficients). It breaks down the good or item being researched into its characteristics, and obtains estimates of the monetary value contribution of each characteristic. In economics, hedonic regression is a revealed preference method for estimating the monetary value of the characteristics of a good. Not to be confused with Hedonic adaptation.
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