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Hedonic Pricing in Realistic Urban Structures

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  • Banzhaf, H. Spencer

Abstract

This paper explores the importance of continuity assumptions in hedonic price functions. Using a set of actual housing data to mimic a realistic city, and using a set of known preference orderings, it simulates a housing market to recover equilibrium prices. It then estimates price regressions on these data to assess the quality of the estimated marginal values for amenities. Despite good fit to the data, the mean marginal values are generally computed with large errors, typically in the range of 25 to 30 percent and sometimes much larger—even though there are no measurement errors or other data problems and no omitted variables. Evidence is presented that, for some amenities with discrete distributions and/or lower priority in preferences, households with different demands cluster on similar amenity levels. This evidence suggests that either not all marginal values can be priced into the equilibrium and/or that they are so discontinuous that even very flexible functional forms cannot identify them.

Suggested Citation

  • Banzhaf, H. Spencer, 2003. "Hedonic Pricing in Realistic Urban Structures," MPRA Paper 101197, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:101197
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    References listed on IDEAS

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    Cited by:

    1. Kuminoff, Nicolai V. & Parmeter, Christopher F. & Pope, Jaren C., 2008. "Hedonic Price Functions: Guidance On Empirical Specification," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6555, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Kuminoff, Nicolai V. & Jarrah, Abdul Salam, 2010. "A new approach to computing hedonic equilibria and investigating the properties of locational sorting models," Journal of Urban Economics, Elsevier, vol. 67(3), pages 322-335, May.

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    More about this item

    Keywords

    Hedonic price function; nonlinear pricing; housing markets; willingness to pay for amenities;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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