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Hedonic regression

Hedonic regression Definition

Hedonic regression, or more generally hedonic demand theory, in economics is a method of estimating demand or prices. It decomposes the item being researched into its constituent characteristics, and obtains estimates of the value of each characteristic. In essence it assumes that there is a separate market for each characteristic. It may be estimated using ordinary least squares (OLS) regression analysis. Often an attribute vector (or dummy variable) is assigned to each characteristic or group of characteristics. Each characteristic within a vector is either included in the regression or not, by multiplying it by either 1 or 0.

It is commonly used in real estate economics and consumer price index calculations. In consumer price index calculations hedonic regression is used to control the effect of changes in product quality. Price changes that are due to substitution effects are subject to hedonic quality adjustments.

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