Hedonic Pricing Method, the Third Law of Demand, and Marketing Strategy: An Abstract

The main contributions of this paper can be divided into the theoretical side and the empirical side. On the theoretical side, we integrate the third law of demand with the multiple-characteristic theory, aka the hedonic pricing method, to explain how marketers deliver different product positioning concepts to customers by means of the different arrangements of the product attributes in the multiple-attribute product. In fact, the arrangement, or the adjustment, of product attribute structure in the multiple-attribute product not only influences the perceived concept of product positioning but also affects the relative price between products of different positioning. For example, when all the product attributes in a product are all first-rate, it helps this first-rate multiple-attribute product lowers the relative price between this first-rate product and its second-rate substitute. This explains why most product attributes in a luxury vehicle, like a BMW, are superior to those attributes in a middle-class vehicle, like a Toyota. Furthermore, the arrangement, or the adjustment, of the product attributes also alters the quantities demanded of different products. In comparison with selling the first-rate multiple-attribute product in other market segments, when the first-rate multiple-attribute product is sold in its target market segment, the ratio of quantities demanded of the first-rate product over the second-rate product is higher. For example, the ratio of the sales volume of the higher-rate BMW model over the lower-rate BMW model is higher than the ratio of the sales volume of the higher-rate Toyota model over the lower-rate Toyota model. On the empirical side, by means of integrating the hedonic regression model with the third law of demand, in this paper, we introduce how the hedonic pricing method determines the product attributes that can alter the product positioning of the multiple-attribute product. One of the most significant implications of our research is that our research approach integrates marketing research with economics, and this integration helps us to reconsider the marketing strategy, including market segmentation, the choice of the target market, and product positioning, based on the economic principle. For example, our research approach deciphers how the level of involvement in consumption influences customers’ consumption behaviors in a highly systematic way.