Willingness to Pay in Hedonic Pricing Models

The value of a differentiated product is simply the sum of its parts. This concept is easily observed in housing markets where the price of a home is determined by the underlying bundle of attributes that define it and by the price households are willing to pay for each attribute. These prices are referred to as implicit prices because their value is indirectly revealed through the price of another product (typically a home) and are of interest as they reveal the value of goods, such as nearby public amenities, that would otherwise remain unknown. This concept was first formalized into a tractable theoretical framework by Rosen, and is known as the hedonic pricing method. The two-stage hedonic method requires the researcher to map housing attributes into housing price using an equilibrium price function. Information recovered from the first stage is then used to recover inverse demand functions for nonmarket goods in the second stage, which are required for nonmarginal welfare evaluation. Researchers have rarely implemented the second stage, however, due to limited data availability, specification concerns, and the inability to correct for simultaneity bias between price and quality. As policies increasingly seek to deliver large, nonmarginal changes in public goods, the need to estimate the hedonic second stage is becoming more poignant. Greater effort therefore needs to be made to establish a set of best practices within the second stage, many of which can be developed using methods established in the extensive first-stage literature.

A Non-Market Valuation Approach to Environmental Cost-Benefit Analysis for Sanitary Landfill Project Appraisal

Extensive non-engineered landfilling practice in developing countries has raised environmental concerns, but operating a sanitary landfill appears infeasible due to financial incapability. This study aims to determine the feasibility of a sanitary landfill project by including its environmental values into the project appraisal while simultaneously applying three policy-relevant methods—non-market valuation, benefits transfer, and cost-benefit analysis—in two study areas in Peninsular Malaysia. The non-market valuation study used choice modeling, a questionnaire-based technique, to elicit willingness to pay among 624 households toward the environmental attributes of the sanitary landfill. Their responses resulted in the monetary values of the environmental attributes by referring to implicit prices of leachate discharge, bad odor, disease vector and view. The implicit prices of bad odor (RM2.29 per month) and view (RM3.59 per month) in the two study areas were transferable and used as a proxy of additional solid waste disposal payment in environmental cost-benefit analysis. Positive net present value offers empirical evidence of the feasibility of the sanitary landfill project. The findings show that the inclusion of environmental values in project appraisals increases the chances of implementing sanitary landfills, providing a new approach to address the environmental concerns in developing countries. Future research should consider the external costs along with the external benefits to allow for a comprehensive comparison between environmental values in environmental cost-benefit analysis.

Wine price determinants. Is there a homogeneous international standard?

This article presents an international comparison of the main determinants of wine prices in specialist online wine shops. Hedonic price functions were estimated for 9624 wines spread among four datasets from France, Italy, Germany and Australia. To explain price variation data was collected on wine classification, closure type, wine origin, medals or awards, vintage, alcohol content, color, and grape variety. Results from quantile regression models show that the wine vintage is a common price driver in all markets and quantiles. A quite similar effect was found for alcohol content. In terms of color, the implicit prices for red and white wines are also structurally different between countries, particularly in origin, blend, closure, awards and age. Thus, the markets should be assumed as heterogeneous, and the extrapolation of the results from one market to another may lead to erroneous management decisions.

Do implicit prices show differences in tourists’ valuation on hotel attributes in different time periods and different markets? A case of Beijing

Purpose The purpose of this paper is to analyze the implicit prices of hotel attributes in different time periods and different markets. Design/methodology/approach With data from the travel meta-search engine, this paper chose 3- to 5-star hotels in Beijing’s central business district and use hedonic price models. Findings The results suggest that the attributes with significant implicit prices differ in different time periods; the same attributes with different implicit prices in different time periods; the same attributes with different implicit prices in different market segments. Originality/value This study may help to explain the different findings on the relationship between the attributes and room rates of Chinese star-rated hotels in different time periods, and will be useful in both revenue optimization efforts and the design of new hotels projects.

Real estate listings and their usefulness for hedonic regressions

Real estate platforms provide a new source of data which has already been used as a substitute for transaction data in hedonic regression applications. This paper asks whether it is valid to do so in the established research areas of (1) willingness to pay estimation, (2) automated valuations, and (3) price index construction. It therefore compares listings and transaction data and regression results derived from them. We find that ask prices stochastically dominate sale prices, mainly because the composition of characteristics differs between the two data sets. But estimates of implicit prices also differ. As a result, willingness to pay estimates from listings data can be widely off when compared with estimates from transaction data. Listings data are not very useful to predict market values of individual houses either, as these predictions suffer from upward bias and large error variance. We find, however, that an ask price index complements a sale price index, as it is useful for nowcasting.

Impacts of Tourism Demand on Retail Property Prices in a Shopping Destination

Understanding the relationship between tourism demand and retail property prices is of great significance to tourist destinations, especially shopping destinations. The increase in tourism demand may alter the implicit prices of certain retail property characteristics (e.g., age and accessibility to transit). This study examines how tourism demand (measured by tourist volume) affects retail property prices in the tourist precinct of a shopping destination, namely Hong Kong. The implementation of the policy Individual Visit Scheme (IVS) in 2003 in Hong Kong has substantially increased tourist shoppers from Mainland China, and it is used as a quasi-natural experiment of the increased tourist volume. Spatial and non-spatial hedonic pricing models are developed based on the ground-floor retail property transaction data of Causeway Bay, Hong Kong before and after the IVS (1993–2011). The findings of this study are as follows. (1) Accessibility to transit has a larger positive price effect after the implementation of the IVS. (2) The implicit price of accessibility to accommodation facilities is not significantly altered by the implementation of the IVS. (3) Age has a larger negative price effect after the implementation of the IVS. The first two outcomes are related to the economic concerns of tourist shoppers, while the last can be explained by their hometown experience. Finally, practical implications are discussed.

Households’ acceptability of local (Ofada) rice based on quality attributes in South-West, Nigeria

Purpose The purpose of this paper is to examine households’ acceptability of local (Ofada) rice by identifying the quality attributes influencing marginal implicit prices (MIPs) paid by rice consumers’ households in South-West, Nigeria. Design/methodology/approach The data used for this study were collected from a survey of 600 rice-consuming households in the study area. A multistage sampling technique was employed to select the respondents. Well-structured questionnaires were used to collect information on general households’ socioeconomic characteristics, their desirability and preference for local (Ofada) rice, and market prices of Ofada rice. Kendall’s concordance test was performed to confirm agreement among respondents in their rankings of the rice quality attributes. Hedonic price function was used to examine the relationship between implicit prices paid by consumers based on quality attributes of local (Ofada) rice, as observed in the market. Findings The result of Kendall’s coefficient of concordance revealed that there is 73.74 per cent agreement in ranking quality attributes of local (Ofada) rice consumers’ households in the study area. Colour, perceived nutrient level, taste, grain shape and rate of breakage were the most ranked quality attributes with mean attribute ranking scores of 1.56, 1.69, 3.12, 5.53 and 5.86, respectively. The result of the hedonic pricing model revealed that households are willing to pay MIPs of ₦71.03 ($0.20), ₦45.23 ($0.13), ₦32.98 ($0.09), ₦21.06 ($0.06) and ₦14.41($0.04) per kg for colour, grain cohesion, grain shape, perceived nutrient level and perceived chemical storage, respectively, while discounting MIPs of ₦60.55 ($0.17), ₦19.36 ($0.05), ₦17.14 ($0.05) and ₦6.00 ($0.02) for texture, rate of breakage, perceived freshness and low swelling capacity per kg of local (Ofada) rice, respectively. Research limitations/implications Continuous importation of rice into the country has many negative implications such as worsening of the poverty status of local rice farmers, unemployment of teeming youths engaged in rice value chain, and exposure to soaring and unpredictable price bringing unsustainable development. Lastly, over-dependency on rice importation, if not checked, can also permit dumping of low quality and sometimes expired rice into the country. All aforementioned reasons will make it difficult for local rice to compete favourably with imported varieties. Practical implications Kendall’s coefficient of concordance and Hedonic model were used as a diagnostic tools. These diagnostic tools show the need for government and relevant stakeholders to focus on improving the quality of local (Ofada) rice, especially the undesirable attributes. This could be achieved by adopting modern processing technology, that will enhance production and consumers’ acceptability, which could make local (Ofada) rice have good market share against imported brands. Social implications The economic value of a good is revealed by the consumer’s willingness to pay for the good, consequently increasing production through consumers’ acceptability, and improve living standard of farmers and processors through increased earnings. Originality/value The choice of a particular local rice, especially local (Ofada) rice, is made to estimate the effect of different attributes on the price paid by rice consumers’ households and to help in the development of effective technologies and policy that enhance better rice quality using both Kendall’s coefficient of concordance and Hedonic model to achieve the objective. For the first time this research has given clarity on the monetary value attached to local (Ofada) rice consumption by rice consumers’ households through quality attributes.

Understanding real estate investments through big data goggles

Purpose This paper aims to develop a conceptual understanding and a methodological approach for calculating residential net initial yields for both a buy-to-hold and rental investment strategy from hedonic models. Design/methodology/approach The markets modelled comprehend of dwellings for rent and sell in Germany. For each of them, two regression models are estimated to extract implicit prices and rents for an artificial identical dwelling and estimate the willingness to pay for the same asset from both a buy-to-hold and rental investment strategy. Findings The 3,381 estimated net initial yields in the 161 German markets showed a spatial pattern with the biggest and most attractive cities showing the lowest yields and a self-adjusting process in the markets surrounding the top cities. The net initial yields over time show that prices have increased stronger than rents, leading to rock bottom yields for residential assets and a significant premium in comparison to government bond yields. The approach responds to the spatial hierarchy of markets in Germany, meaning that the level of the estimated yields is accurate and achievable from an investment perspective. Practical implications The investment case in residential markets is certainly unique as net initial yields are scarce, especially due to the relatively low number of investment comparables. The paper sheds light on this problem from a conceptual and methodological perspective and confirms that investment yields are deducible by making usage of hedonic models and big data. Originality/value In the era of digitalization and big data, residential assets are mostly brought to the market via digital multiple listing systems. Transparency is an essential barrier when assessing the pricing conditions of markets and deriving investment decisions. Although international brokers do provide detailed investment comparables on – mostly commercial – real estate markets, the residential sector remains a puzzle when it comes to investment yields. The paper sheds light on this problem.