Overpricing in a spatial hedonic frontier model: the case of ski lift tickets in Norway

Abstract

A general assumption of the standard hedonic price model is that producers produce outputs/services efficiently, and deviations from this situation are assumed to involve either overcharging or undercharging. Using the profit maximizing behaviour, we derive an alternative hedonic model to show when prices are overcharged for services or products with the same characteristics. We argue that price charged by a firm depends on the price charged by the neighbouring firms giving rise to spatial dependence in prices. Based on this philosophy, we present a spatial-lag frontier hedonic pricing model. This new modelling framework is illustrated using data from Norwegian ski resorts in the winter season of 2014/2015 to examine whether one-day ski lift ticket prices are interrelated with other operators and to what extent the ski lift tickets are overcharged, if any.