What is hedonic price analysis?

Hedonic price analysis examines goods in terms of their components or characteristics. When shopping, people might consider a food's appearance and nutrition and be willing to pay a certain amount for each. So using hedonic analysis, the total cost of the food would be modelled as

price = appearance * price of appearance + nutrition * price of nutrition

Hedonic pricing helps with assessing how consumers value different aspects of a good. In the example just given, we may be interested in appraising how much people value a food's appearance relative to its nutritional content (some estimates for the valuation of various nutritional elements are given in the research here for United States consumers). If we know about the appearance and nutritional content of a new good that is soon to enter the market, we could estimate its price. The original hedonic equation might have to include a cross-term to make it accurate - consumers might value sweetness and they might value savouryness, but not together. A large negative cross-term sweetness*savouryness would capture their dislike of the combination.

Hedonic pricing also has applications in calculating price inflation and for comparing international prices. We might find that two countries have the same number of computers, but they have different computing speeds. We should make allowance for the different qualities, and hedonic analysis is one way of doing so. Some approaches are described here.