Hedonic price analysis

Pricing is a strategic choice for all firms. It not only generates revenue for a company to survive but can also be used as a communicator, as a bargaining tool and a competitive weapon. The consumer can use price as a means of comparing products, judging relative value for money or product quality (Brassington and Pettitt, 2007). In tourism, pricing decisions are often complex. For example, the price of a hotel room is normally affected by seasonality, type of the room, facilities provided, or even attributes of the external environment such as noise, pollution, distance from a specific landmark, or outside views. From a managerial perspective, it is critically important to understand consumer perceptions of each of the attributes associated with the price: characteristics that a customer is willing to make an extra payment for and those which are irrelevant in the determination of consumer choices and preferences (Chen and Rothschild, 2010). Hedonic price analysis (HPA) makes it easier to discern which characteristics are valued by consumers and to what extent (Falk, 2008). In addition, HPA is also able to put a price estimate onto non–market product or service characteristics. For example, Mahan (1997) found that proximity to river streams had a significant influence on willingness to pay (i.e., respondents valued the proximity to river streams equal to $13.81 per foot). Hence, this technique is particularly useful for managerial decision making and evaluating individual preferences. In this chapter, we will explain the theory of HPA, followed by an illustration of its application in tourism research, and concluded by a discussion of managerial implications.