Hedonic Pricing

Categories: Company Management

Hedonic pricing assumes that price is determined by both internal (or “intrinsic”) factors, as well as external factors, which can be measured using the hedonic price method and hedonic regression analysis.

Take a house on the real estate market, for example. The price of the house likely depends on what factors? The location, the size, the age, the view, the crime, the schools in the district...etc.

It’s a hedonic pricing model, since it is measuring the effect of multiple factors, some which are internal to the house (like the size) and some of which are external (like the park that got turned into a natural gas extraction area across the street). It uses regression analysis to determine the relative strength of each factor, and by exactly how much each factor can be estimated to contribute to the overall price.

Any hedonists in the house?

Find other enlightening terms in Shmoop Finance Genius Bar(f)