9 - The Hedonic Price Approach to Measuring Demand for Neighborhood Characteristics

Abstract

This chapter reviews the hedonic price approach as a technique for measuring the implicit prices of goods that are not themselves explicitly traded in markets but are characteristics of traded goods. The hedonic technique is a method for estimating the implicit prices of characteristics that differentiate closely related products in a product class. The estimation of the demand for a characteristic of housing involves a two-step procedure in which first the implicit price of the characteristic is estimated by the application of the hedonic price technique. There are several assumptions that must be satisfied to apply the hedonic technique to estimating the demand for neighborhood characteristics. For the use of the hedonic price approach at all, it is necessary to assume that the observed housing prices approximate equilibrium prices, that is, the prices that just make everyone willing to hold the existing stock of houses. In other words, the assumption of rapid price adjustment is basic to the technique. One of the virtues of the hedonic price technique is that the problem can be handled through the choice of variables included in the hedonic price function.