Profit Maximization Revisited:
Considering the Role of Hedonic Pricing
Eduardo Segarra
Professor of Agricultural and Applied Economics
Texas Tech University
The PROFIT maximization conditions
without HEDONICS are:
VMPx = rx
perfect competition in BOTH input and output
markets
VMPx = rx (1 + Es-1)
perfect competition in the output market but NOT in
the input market
VMPx (1 + Ed-1) = rx
perfect competition in the input market but NOT in
the output market
VMPx (1 + Ed-1) = rx (1 + Es-1)
NO perfect competition in BOTH input and output
markets
Given Y = f(X), where fx > 0 and fxx <0
Where Y is the level of output produced and X is amount of input used
Assuming an “output quality” relation such as
Q = g(X),
Py = w(Y, Q)
where gx represents the marginal change in quality of output due to a
change in the level of input use and assuming
The PROFIT maximization conditions with HEDONICS are:
VMPx + Y Wq gx = rx
perfect competition in BOTH input and output
markets
VMPx + Y Wq gx = rx (1 + Es-1)
perfect competition in the output market
but NOT in the input market
VMPx (1 + Ed-1) + Y Wq gx = rx
perfect competition in the input market but
NOT in the output market
VMPx (1 + Ed-1) + Y Wq gx = rx (1 + Es-1)
NO perfect competition in BOTH
Input and output markets
These HEDONIC relationships could be extended to the INPUT SIDE .....
This would be the case in which the QUALITY of the INPUT used is
acknowledged through its price