titioners have to reevaluate outcomes in response to the steady flow of
information not captured by a model using their market knowledge and
experience.
Hedonic Pricing
In the agricultural economics literature, the vast majority of studies
applied Hedonic technique to pricing of grains, oil seeds, and fiber, or
to meat and dairy products. Although Waugh (1928) pioneered the ap-
plication of Hedonic technique to price quality attributes of fresh veg-
etables decades ago, the technique has been used infrequently. The
Hedonic technique studies consumer demand for attributes by applying
the utility maximization framework as the foundation of economic analy-
sis. Much of the theoretical work on consumer utility maximization was
conducted by Theil (1952), Lancaster (1966), and others, and provided
sound theoretical foundations for empirical studies.
Consumers view a good as a bundle of attributes and rationally eval-
uate how each of them contributes to the level of satisfaction or utility.
An attribute contribution is measured “on the margin,” i.e., by how much
the utility level changes from consumption of an additional unit of an
attribute. An algebraic example of the application of the Hedonic tech-
nique consists of the utility maximizing equation:
maxUf(Xi; Kj) (12.1)where Xiis the vector of produce attributes and Kjis a set of other rel-
evant variables influencing consumer utility associated with produce
consumption. Empirical studies include in the Kset of variables demo-
graphic and socioeconomic measures, descriptors reflecting preferences,
and constructs based on beliefs or attitudes of consumers. The differen-
tiation of Equation (12.1) yields a first-order condition which, when
solved for the product price, provides a measure by how much a price
changes in response to the varying amount of an attribute in a traded
unit of a product. The marginal quantity of an attribute is necessary to
calculate the marginal price per unit and the calculation of the marginal
monetary value of the total amount of the attribute contained in the prod-
uct. Hedonic technique implies that the price paid by buyers is a sum of
the marginal monetary values of all attributes.
Consumers recognize that the mix of attributes varies across units of
fresh produce. The tradeoffs between one attribute and another may in-
fluence consumers’ choice. The Hedonic technique and the utility max-
Market Valuation of Quality 233