The Willingness to Pay for Quality Aspects of Durables: Theory and Application to the Car Market

Tinbergen Institute Discussion Paper No. 11-005/3

36 Pages Posted: 10 Jan 2011

See all articles by Ismir Mulalic

Ismir Mulalic

Technical University of Denmark

Jan Rouwendal

VU University Amsterdam - Department of Spatial Economics; Tinbergen Institute

Date Written: December 24, 2010

Abstract

Conventional hedonic analysis measures willingness to pay for attributes on the basis of marginal fixed costs. We argue that in many cases variable costs are also affected by these attributes and that this should be taken into account. We develop a simple model to show that the marginal willingness to pay for a quality attribute has to be equal to the full marginal cost, which includes marginal fixed as well as variable costs. The model is applied to Danish data on car ownership and use. We use a nonparametric estimation procedure to estimate hedonic price functions for fixed and variable costs. We recover each consumer''s marginal willingness to pay, the marginal fixed costs, and the marginal variable costs for car attributes using first-order conditions for utility maximization. We show that the marginal fixed and variable costs have the same (positive) sign and that both contribute substantially to the marginal willingness to pay. Estimation results suggest that marginal variable costs are on average about 20% of the full marginal costs. Finally, we estimate the distribution of the marginal rate of substitution between quality attributes and variable costs, which can be interpreted as a structural parameter, and we investigate how this marginal rate of substitution varies with household characteristics.

Keywords: Durable Goods, Willingness to Pay, Hedonic Analysis, Nonparametrics, Car Market

JEL Classification: C14, D46, L62, L68

Suggested Citation

Mulalic, Ismir and Rouwendal, Jan, The Willingness to Pay for Quality Aspects of Durables: Theory and Application to the Car Market (December 24, 2010). Tinbergen Institute Discussion Paper No. 11-005/3, Available at SSRN: https://ssrn.com/abstract=1737771 or http://dx.doi.org/10.2139/ssrn.1737771

Ismir Mulalic (Contact Author)

Technical University of Denmark ( email )

Anker Engelunds Vej 1
Building 101A
Lyngby, 2800
Denmark

Jan Rouwendal

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
1081HV Amsterdam
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
40
Abstract Views
763
PlumX Metrics