What is hedonic pricing?
Hedonic pricing is a method used to determine the value of various goods that do not have a standard market valuation, for example a clean environment, works of art, electronic products, motor vehicles, brands, and others.
In the real estate sector, the hedonic pricing method is often used to analyze estimates of prices by looking at environmental or ecosystem conditions that can directly influence the market price of the surrounding land and houses. This assessment method requires strong statistical expertise and model specification, after a period of data collection.
Pricing methods in the health or education sector that do not have market value can be studied empirically using regression analysis. The main purpose of the analysis is to determine the value of an object in the form of a function of individual characteristics, which makes it possible to assess price changes due to changes in individual attributes.
History of hedonic pricing
From an economic point of view, hedonic pricing is very easy to understand. Initially the hedonistic price theory grew from the argument of an American economist named Harvey Sheldon Rosen, who put forward the idea that when calculating the utility function that describes consumer preferences it is necessary to take into account not only the volume of goods but also the aesthetic value and quality of these goods.
For example, the net environmental value can be calculated as the difference between the value of real estate in an ecologically clean location and the value of real estate in an environmentally unsustainable location.
Hedonic pricing according to experts
Hedonism as a worldview principle means enjoyment through the good that surrounds us. According to Eldiyar Muratov, president of the APAC Castle Family Office Singapore, Hedonic pricing is a conditional definition of the value of various phenomena that does not have generally accepted estimates. For example, environmental cleanliness is obtained from algorithmic calculations and analysis of the prices of certain goods or services that have characteristics and properties that correspond to the phenomenon. In other words, to obtain the formula for a clean environmental value, one can calculate the difference between the cost of living or standard of living in an ecologically clean place and the cost or rate at an unfavorable place. This difference will be an indication of the calculation of the cost of environmental cleanliness.
According to Petr Pushkarev, the head of the Tele Group analysis, hedonism is very close to the pleasure factor obtained from buying goods, services, elite real estate in a beautiful and environmentally friendly place with beautiful views, which is very decisive for consumers for the price of this type of service. uses a hedonic approach to pricing. Some Chinese tablets and smartphones are not inferior to most of the characteristics of Apple products. However, there are details that create comfort in use, or the image of a certain product that has developed over the years, which makes one pay more.
The essence of Hedonic Pricing determination
The price of a building or plot of land is determined both by the characteristics of the property itself (i.e. internal factors, for example, area, condition, appearance, and various features such as sophisticated pipes or solar panels, ceiling shape, outer and inner profiles etc.), and environmental characteristics. (ie external factors - the level of pressure in the area and / or distance from schools and city centers, levels of water and air pollution, and distance to shopping centers.
The Hedonic Pricing model is used to determine how strongly each factor influences the market price of the property.
So, if the internal factor is owned it means that it can maintain stability, while all other price differences will depend on external conditions. With regard to housing valuation, the Hedonic Pricing model is relatively simple as it relies on existing market prices and a variety of available data.
Advantages and Disadvantages of Hedonic Pricing Pricing
Hedonic Pricing has many advantages. For example, the ability to assess the importance of individual factors, especially when applied to the housing market that I demonstrated above, where the data are already accurate. At the same time, this method is quite flexible and easily adapts to the relationship between the goods and external conditions in other markets.
However, Hedonic Pricing also has drawbacks to consider. One of them, this method only captures the willingness of consumers to buy what they perceive as external benefits and their consequences.
If the prospective buyer does not know that the water in the area is polluted, or if the construction site is inadequate, this will not change the housing price. In addition, this model does not always take into account external factors or the influence of laws and regulations (such as taxes and interest rates), even though taxes can significantly affect prices.
So in essence hedonic pricing is pricing based on conditions that make users feel comfortable, so that they are willing to pay whatever it takes to get according to their pleasure. Hedonism for now also has the same meaning as a lifestyle, where the price of goods corresponds to high prestige. For example the Iphone class will always be more expensive than Samsung or OPPO, and the Ferrari class will always be more expensive than Toyota.