Application of The Hedonic Pricing Method
While studying the application of the Hedonic Pricing Method, the first assumption made is the value of a house is affected by a particular combination of characteristics that it possesses given that properties with better qualities demand higher prices as compared to properties with lower qualities. This is the Hedonic Pricing Function.
The price of a house will thus be affected by the structural characteristics (s1, s2, s3...) of the house itself, characteristics of the locality/neighbourhood (n1, n2, n3...), and environmental characteristics (e1, e2, e3...)
Structural Characteristics could be anything from size of the house, to the number of rooms, type of flooring, etc. Neighbourhood attributes include variables like posh-ness of the locality, quality of roads, etc. And the environmental characteristics are variables such quality of air, proximity to parks, beaches, dumping yards, etc.
The analysis takes place in two stages. The first stage involves employing regression techniques to estimate the Hedonic Price Function of the property. This function will relate the prices of many properties in the same housing area to the different characteristics.
So Price Function (P) = f (s1, s2, s3...sj; n1, n2, n3,...nj; e1, e2, e3,...ej) This function could be linear or non-linear. The prices may change at an increasing or decreasing rate when the characteristics change.
When you now differentiate the price function with respect to any one of the above characteristics, the implicit price function for that particular characteristic is yielded. It is considered implicit because the price function is indirectly revealed to us by what the people are willing to pay in order to obtain better quality or quantities of the characteristic.
In the second stage, these implicit prices are regressed against the actual quantities/qualities chosen by the people in order to attain the marginal willingness to pay for the amenity. The results of this analysis will indicate the changes in property values for a unit change in each characteristic, given that all the other characteristics are constant. Some variables however may be correlated. This will result in similar changes in their values.
Read more about this topic: Hedonic Regression
Famous quotes containing the words application of, application and/or method:
“Courage is resistance to fear, mastery of fear—not absence of fear. Except a creature be part coward it is not a compliment to say it is brave; it is merely a loose application of the word. Consider the flea!—incomparably the bravest of all the creatures of God, if ignorance of fear were courage.”
—Mark Twain [Samuel Langhorne Clemens] (1835–1910)
“If you would be a favourite of your king, address yourself to his weaknesses. An application to his reason will seldom prove very successful.”
—Philip Dormer Stanhope, 4th Earl Chesterfield (1694–1773)
“Letters are above all useful as a means of expressing the ideal self; and no other method of communication is quite so good for this purpose.... In letters we can reform without practice, beg without humiliation, snip and shape embarrassing experiences to the measure of our own desires....”
—Elizabeth Hardwick (b. 1916)