The Hedonic Method

Heterogeneous or differentiated goods are products whose characteristics vary in such a way that there are distinct product varieties even though the commodity is sold in one market (e.g., cars, computers, houses). The variation in product variety gives rise to variations in product prices within each market. The hedonic method for non-market valuation relies on market transactions for these differentiated goods to determine the value of key underlying characteristics. For instance, by observing the price differential between two product varieties that vary only by one characteristic (e.g., two identical cars, but with one having more horsepower than the other), we indirectly observe the monetary trade-offs individuals are willing to make with respect to the changes in this characteristic. As such, the hedonic method is an “indirect” valuation method in which we do not observe the value consumers have for the characteristic directly, but infer it from observable market transactions.