HEDONIC PRICES IN THE MALTING BARLEY MARKET



July 1984

donic price functions are specified and es-
timated using standard regression proce-
dures, and the coefficients can be used to
derive estimates of marginal implicit
prices for the characteristics.

The objectives of this study are to de-
velop and estimate a hedonic price func-
tion in the malting barley market and de-
rive estimates of the marginal implicit
prices of the characteristics. The marginal
implicit price of a characteristic is an eco-
nomic concept similar to premiums and
discounts commonly used in the grain
trade and indicates the market deter-
mined value of a quality attribute. These
results are useful to producers in making
production and marketing decisions, to
merchandisers throughout the market sys-
tem, and to plant breeders making deci-
sions on trait selection in breeding pro-
grams in which large expenditures are
made.

Theoretical and Empirical Models

Malting barley is a productive input
used to produce malt and eventually beer
and has several characteristics. One of the
important features of the market for malt-
ing barley is the heterogeneity in quality
across shipments. As a result, observed
prices vary across shipments in response
to their characteristics. The input char-
acteristics model views inputs as being
useful because of the content of their
characteristics. An input characteristic
production function can be used with the
neoclassical theory of the firm to derive
marginal implicit prices, or imputed
prices, for each of the characteristics.

Theoretical Model

Hedonic price analysis was initially
presented in the literature as an empirical
concept (see, for example, Griliches and
Court). Lancaster developed a theoretical
model of characteristics demand for con-
sumer goods which provided a conceptual

Western Journal of Agricultural Economics
framework for previous and subsequent
empirical analyses. Rosen further refined
the theory of hedonic prices with partic-
ular emphasis on market equilibrium.
Much of the theoretical development and
applications of product characteristics de-
mand analysis applied to agriculture for
both inputs and consumer goods can be
attributed to Ladd (in particular Ladd;
Ladd and Martin; Ladd and Suavannunt).

The theoretical development assumes a
perfectly competitive, multiproduct firm
where each production function is inde-
pendent of the other production func-
tions. The production function using in-
put characteristics is

qy = fy(qiy. q2y. ■ ■ ■. qmy)               (1)

where qy is the quantity of output y pro-
duced, and qjy is the total quantity of char-
acteristic j (j = 1, . . . , m) used in the pro-
duction of y. The firms’ profit function is

π = ∑ Pyfy(qiy, q2y, ∙ ■ ■ , qmy)

- ∑ ∑ CA           (2)

where Py and Px. are output and input
prices respectively, and Xiy is the quantity
of input i used in the production of y. The
total quantity of each characteristic, qjy, is
a function of both the quantity of input
use, xiy, and the quantity of characteristic
j contained in each unit of xiy. Conse-
quently, maximization of (2) requires the
function of a function rule for differentia-
tion.1 Maximizing (2) and solving for Pxi
gives

1 In particular:

qjy = fl(x,y, x2y . . . , xiy, xlly, xl2y, . . . , x∣ny)
where x∣ny is the quantity of the characteristic j con-

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