Hedonic Prices and Implicit Markets: Estimating Demand and Supply Functions for Differentiated Products

In selecting the level of quality to purchase, the buyer of a differentiated product also selects a point on the marginal price schedule for that product. Thus, in general, the demand functions for product characteristics cannot be consistently estimated by ordinary least squares. Market equilibrium...

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Bibliographic Details
Published in:The Journal of political economy 1987-02, Vol.95 (1), p.59-80
Main Author: Epple, Dennis
Format: Article
Language:English
Subjects:
Applications
Consistent estimators
Econometrics
Economic models
Economic theory
Error rates
Estimates
Instrumental variables estimation
Least squares
Market
Mathematical independent variables
Mathematical models
Political economy
Price functions
Prices
Product differentiation
Supply
Supply & demand
Supply and demand
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Summary:In selecting the level of quality to purchase, the buyer of a differentiated product also selects a point on the marginal price schedule for that product. Thus, in general, the demand functions for product characteristics cannot be consistently estimated by ordinary least squares. Market equilibrium produces a matching of characteristics of demanders and suppliers. This matching restricts the use of buyer and seller characteristics as instruments in estimating demand and supply functions for product characteristics. An analysis is presented to develop these issues. A stochastic structure for hedonic equilibrium models is then offered, identification results are presented, and estimation procedures are outlined. A great deal of care in specification and estimation is needed if valid inferences are to be derived from such models.
ISSN:0022-3808
1537-534X
DOI:10.1086/261441