Measuring Consumers’ Willingness to Pay for Each Attribute of a Product: A Review on Hedonic Pricing Model

Abstract

The Hedonic pricing model requires that a good, per se does not provide utility; it is the characteristics of the good that gives rise to utility. The total amount of utility a consumer receives from the consumption of a good is subject to the total amount of the characteristics contained in a good purchased. The marginal monetary value of the good’s characteristics is the product of the marginal unit of the characteristics in the good and the marginal implicit prices of the characteristics. In fact, this model reflects actual choices made by consumers, and they can adopt it to estimate their willingness to pay for a good’s characteristics considering several possible interactions between the good’s characteristics–both internal and external. It can be used in product innovation, product packaging, and designing additive services, which gives a producer a competitive advantage in the market. On the other hand, this model may be counterproductive in an environment where information asymmetry exists as it captures only the willingness to pay for perceived differences of attributes and their direct consequences. Therefore, the effective analysis of this model highly depends on the correctness of model specification and different functional forms.

Keywords: Hedonic pricing model, willingness to pay, revealed preference, equilibrium price, and regression analysis