The hedonic pricing method – is used in the determination of the economic value for an ecosystem service or external factor that may influence the market price of a good or asset. The method is commonly applied in the valuation of properties, such as houses, and accounts for economic costs or benefits, which may influence the overall value of the asset or, as commonly presumed, a house. Hedonic price valuation is very quantitative and relies on statistical analysis and informed model specifications. Hedonic Pricing Model is defined as a pricing model of the goods sold which takes into consideration the internal as well as external factors.
Advantages
Below mentioned are some of the major advantages of the Hedonic Pricing
- It focuses more on the consumption patterns of the customers and has the ability to price fairly.
- It takes into account both internal and external factors that will affect the decision making of the buyer.
- Gives more preference to the likes and dislikes of the buyer to buy a house.
- A 360-degree approach in order to price a particular product.
Disadvantages
- It does not take into account the information which is hidden from the buyer of the house in order to inflate the price. Eg: If there is a water problem in the locality in spite of being a good location it may face opposition from the buyers. Hence by not disclosing the fact, the builder may keep the price intact of the house.
- It sometimes does not take into account the interest rates and other taxes that can have a massive impact on the pricing.
- Changing government policies can be very difficult to derive a price.
- A costlier process to execute
Limitations
- It gives more weight to external macro factors thus ignoring the internal ones which might be of more weight.
- A complex model to execute.