The impact of functional and social value on the price of goods

Abstract

According to hedonic pricing theory (HPT) market forces operate on individual characteristics of a good, and the price of a product is the aggregate of the price across those characteristics. The relationship between price and characteristics remains poorly understood because characteristic qualities are hard to quantify, people have varying levels of information about characteristics, and people have heterogeneous preferences over characteristics. By analyzing data from a large, market-driven virtual world we are able to test HPT, while largely avoiding these pitfalls. We find that a linear model with functional characteristics predicts the prices poorly, but a log-linear model performs quite well. Adding social characteristics to this log-linear model improves the predictions substantially. This work strongly supports HPT and demonstrates a “rational” calculus including social value.