![]() P i = β 0 + β 1 C 1 i + β 2 C 2 i + … + β m C C mi + e iĪ hedonic price index can then be created as the characteristics and prices of the good change through time. If there are n different versions of the good, the price of each version might be written as: To model the price of a particular version of a heterogeneous good, let P i be its price, let C i be a vector of m characteristics and let e i be a stochastic error term. Examples include automobiles, houses, and computers. The price of other heterogeneous goods can be, and has been, similarly modeled as a function of a vector of characteristics of that good. Greenness was held to be positively related to perceived quality, while stock size was held to be negatively related to perceived quality. Waugh viewed the perceived quality of asparagus as being determined by the greenness of the asparagus and the size of the stalk. For example, in a 1928 study, Frederick V. Differences in the prices of heterogeneous goods are viewed as reflecting quality differences resulting from different characteristics. In hedonic pricing models, both the characteristics and the prices are known. This tradeoff between quality and quantity is central both to models of hedonic prices and to household production theory. The quality of the good is reflected in the price consumers are willing to pay. In making a purchase, consumers consider both the quantity of the good that they purchase and the quality of the good. In hedonic models, goods are seen as being produced with different characteristics, and the quality of these goods reflects differences in the mixture of these characteristics. Hedonic price models provide a useful way of comparing the prices of heterogeneous goods of differing quality so long as consumers are not themselves using prices to judge quality (consumers are assumed in these models to compare the quality of goods independently of their prices). Hedonic prices reflect the value of differences in the quality of goods.
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