Hedonic Prices for Multicomponent Products

J. Gregory Sidak & Jeremy O. Skog

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The price of a smartphone likely reflects its functional features that consumers value, such as its storage capacity, camera resolution, battery life, display size, and display resolution, among others. However, a nontrivial portion of the price of a smartphone might also be attributable to the brand name and the perceived social value that the brand name imparts, separate from the smartphone’s functionality. By regressing a multicomponent product’s retail price on the product’s individual features, hedonic price analysis enables one to determine how much consumers are willing to pay for each observable feature of a multicomponent product, including a product’s brand name. In this article, we conduct hedonic price analysis of smartphones available in the United States as of December 2018 to test whether a smartphone’s brand name possesses statistically significant explanatory power for a smartphone’s price that is unrelated to the technical functionality of the smartphone, and we find that it does.

As of April 2019, this article is the first publicly reported hedonic price analysis of the demand for features of smartphones in the United States that uses the “least absolute shrinkage and selector operator” (LASSO) regression—an objective variable selection method based on a machine learning algorithm—to identify the functional features that are the best predictors of a smartphone’s price. In contrast, the existing empirical literature has relied on a set of explanatory variables that were chosen either arbitrarily or on the basis of heuristics used by marketing firms. Even after accounting for the objectively selected set of functional features that best predict a smartphone’s retail price, we find that a smartphone’s brand name possesses statistically significant explanatory power for the smartphone’s retail price separate from those functional features. To the extent that hedonic price analysis is used in litigation or arbitration, one advantage of this approach is that it does not rely on any confidential business information, which in turn contributes to its replicability.

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J. Gregory Sidak & Jeremy O. Skog, Hedonic Prices for Multicomponent Products, 4 Criterion J. on Innovation 301 (2019).

J. Gregory Sidak is the chairman of Criterion Economics. He testifies as an expert economic witness in complex business disputes throughout the Americas, Europe, Asia, and the Pacific, and he has twice served as Judge Richard Posner’s court-appointed neutral economic expert on patent damages. Sidak held the Ronald Coase Professorship of Law and Economics at Tilburg University in The Netherlands and the F.K. Weyerhaeuser Fellowship in Law and Economics at the American Enterprise Institute for Public Policy Research. He has also been a senior lecturer at the Yale School of Management and a visiting professor at Georgetown University Law Center. Sidak received A.B. and A.M. degrees in economics and a J.D. from Stanford University. He was Judge Posner’s first law clerk, served on the senior staff of the Council of Economic Advisers in the Executive Office of the President, and was deputy general counsel of the Federal Communications Commission. Sidak has published six books and roughly 200 articles or book chapters. The Supreme Court of the United States, the Supreme Court of Canada, the European Commission, state supreme courts, the U.S. Courts of Appeals, and many other courts and regulatory bodies have cited his writings approvingly.

Jeremy Skog is a Vice President at Criterion Economics. He received his Ph.D. in economics from the Wharton School at the University of Pennsylvania. He also holds an A.B. from Dartmouth College with a double major in physics and economics and an M.A. in economics from Tufts University. He specializes in the use of econometrics and quantitative methods of risk analysis to value complex assets, such as patent portfolios and innovative financial instruments. He previously worked at the U.S. Census Bureau as a subject matter expert in assets and retirement saving where he worked with a variety of survey and administrative data, as well as redesigning the pensions and retirement expectations section of the Social Security Administration Supplement to the Survey of Income and Program Participation.