The Characteristics Model, Hedonic Prices, and the Clientele Effect
In this paper, the characteristics model of Kelvin Lancaster is reconsidered. It is shown by example that equili brium prices need not be linearly decomposable. It does follow that e quilibrium prices must be a convex function of characteristics, howev er. Further, it is shown that this fact holds independent of the form of firm competition (e.g., perfect or monopolistic). Finally, the pr edictions of the theory are discussed in the context of two empirical examples. Copyright 1988 by University of Chicago Press.