HEDONIC PRICE INDEX
Monika Fibor Analityka Gospodarcza III rok
What is this?
• Hedonic index describes how product price could be explained by the product's characteristics.
• Useful when applied to calculate price indices for information and communication products and housing
• Mitigate problems:
new goods to consider
rapid changes of quality
Example from book
YEAR TYPE POWER CLOCK SPEED
A X P
XV
XA+1 Y P
YV
Y1000 computers were sold each year. Their parameters are in the following table:
Example from book
• Qualities will be weighted by their prices
• Technological progress: the computer of type Y did not exist in the previous period A
• In that situation we should use hedonic studies of the relationship between the prices of computers and power.
Purpose
determine what value purchasers of
computers put on improvements to each of
these characteristics
Solution
• Using these relationships, we can estimate what the computer type Y would have cost in year A, had it existed.
• For example, that the price of the new computer type Y is estimated to be 20% higher than that of the computer of type X in year A. This means that the price of Y has decreased by 20% since year A
• The volume of computers in the national accounts for year A + 1 will be calculated “at year A prices”, so at prices that are 20% higher than those of year A.
Second example
• The housing market
• The price of a building or piece of land is determined by:
the characteristics of the property itself
the characteristics of its surrounding environment
• The hedonic price index is used to extent to which each factor affects the price of the home.
