Many goods and services consist of bundles of atomistic goods and services. For example, automobiles differ by the basic characteristics of safety, comfort, and fuel economy. Computers differ by memory capacity, display resolution, and speed. Housing differs by accessibility, privacy, cleanliness of the environment, quantity of housing services, and safety.
In many cases one observes prices only for the overall good or service (bundled good or service). Hedonic pricing attempts to take observations on the overall good or service and obtain implicit prices for the atomistic goods and services. It performs this statistically by regressing the overall price onto the atomistic characteristics.
Griliches (1967, 1971) and Rosen (1974) provided the basic hedonic pricing framework.
Economists frequently estimate hedonic pricing models using data from the housing or labor markets.
Both labor and housing markets have a strong spatial component. Wages vary by part of the city and by region of the country while housing prices depend strongly upon location.
The dependence upon space offers the opportunity to use spatial statistical techniques (spatial autoregressions or kriging) to take advantage of the pervasive spatial autocorrelation among residuals from hedonic pricing models. The use of space helps control for omitted variables correlated with space. Such variables could include crime, air pollution, and other externalities. Insofar as correlations often exist among the omitted and included variables, controlling for space can potentially improve hedonic pricing model parameter estimation and hence estimation of the price of implicit characteristics.
See www.spatial-statistics.com and www.finance.lsu.edu/re (follow spatial statistics links) for more information about the use of spatial statistics and applications to hedonic pricing. See http://www.spatial-econometrics.com (James LeSage's Econometric Toolbox) for additional spatial functions useful for hedonic pricing. These sites include free software, data, and manuscripts pertaining to spatial statistics.
References
Griliches, Zvi. “Hedonic Price
Indexes of Automobiles: An Econometric Analysis of Quality Change,” in Zvi Griliches
(ed.), Price Indexes and Quality Change,
Cambridge: Cambridge University Press, 1971.
Griliches, Zvi. “Hedonic Price
Indexes Revisited: Some Notes on the State of the Art, Proceedings of the Business and Economic Statistics
Section, American Statistical Association, 1967, pp. 324-332.
Rosen, Sherwin. “Hedonic Prices and Implicit Markets:
Product Differentiation in Pure Competition,” Journal
of Political Economy, Vol. 82, Jan./Feb. 1974, pp. 34-55.