Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition

A class of differentiated products is completely described by a vector of objectively measured characteristics. Observed product prices and the specific amounts of characteristics associated with each good define a set of implicit or "hedonic" prices. A theory of hedonic prices is formulated as a problem in the economics of spatial equilibrium in which the entire set of implicit prices guides both consumer and producer locational decisions in characteristics space. Buyer and seller choices, as well as the meaning and nature of market equilibrium, are analyzed. Empirical implications for hedonic price regressions and index number construction are pointed out.