Cointegration relationships and hedonic pricing of differentiated commodities: an application to price dynamics in the US dairy sector

This study investigates the implications of hedonic pricing for price dynamics of differentiated commodities. A conceptual model of hedonic pricing is developed under a Leontief technology, showing how commodity prices reflect the underlying value of their components. Implications for the existence of cointegration relationships among commodity prices are derived. An application to the pricing and dynamics of selected US dairy commodities is presented. It provides evidence on the role of component valuation in the dynamics of dairy commodity prices in the short run as well as in the long run. Distinguishing between market regime and government regime (when the government price support is active), the analysis finds significant differences in dairy price dynamics between the two regimes.