Hedonic Models and Market Segmentation

Abstract

This paper explores the pricing of heterogeneous goods in the presence of market segmentation. We use housing as an example. We extend the theoretical hedonic model of Rosen (1974) and show that, in the presence of market segmentation, the hedonic price line is no longer continuous or unique. Using American Housing Survey data for the Miami and Louisville metropolitan areas and a finite mixture estimation approach, we find distinct market segments based on ethnicity, race, and income.

Keywords: market segmentation, product differentiation, hedonic model, finite mixture model.

JEL Classification: E02, R31, O18.