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Hedonic Pricing Method

The basic premise of the hedonic pricing method is that the price of a marketed good is related to its characteristics, or the services it provides.  For example, the price of a car reflects the characteristics of that car--transportation, comfort, style, luxury, fuel economy, etc.  Therefore, we can value the individual characteristics of a car or other good by looking at how the price people are willing to pay for it changes when the characteristics change.  The hedonic pricing method is most often used to value environmental amenities that affect the price of residential properties.

And via the WSJ:

An Inflation Debate Brews Over Intangibles at the Mall

WASHINGTON -- To most people, when the price of a 27-inch television set remains $329.99 from one month to the next, the price hasn't changed.

But not to Tim LaFleur. He's a commodity specialist for televisions at the Bureau of Labor Statistics, the government agency that assembles the Consumer Price Index. In this case, which landed on his desk last December, he decided the newer set had important improvements, including a better screen. After running the changes through a complex government computer model, he determined that the improvement in the screen was valued at more than $135. Factoring that in, he concluded the price of the TV had actually fallen 29%.

Mr. LaFleur was applying the principles of hedonics, an arcane statistical technique that's become a flashpoint in a debate over how the U.S. government measures inflation. Hedonics is essentially a way of accounting for the changing quality of products when calculating price movements. That's vital in the dynamic U.S. economy, marked by rapid technological advances. Without hedonics, the effect of consumers getting more for their money wouldn't get fully reflected in inflation numbers.

But even as the Federal Reserve raises interest rates amid a recent uptick in inflation, many critics complain the hedonic method is distorting the picture of what's going on in the economy. They say hedonics is too subjective and fear it helps keep inflation figures artificially low -- meaning the Fed may already be lagging in its inflation-fighting mission

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Oct 12th, 2007 at 05:45:50 AM EST

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