THE BINARY QUALITY PRICE FUNCTION: THEORY, EMPIRICAL TESTING, AND APPLICATION TO ISRAELI TOMATO EXPORT

O. Hochman, U. Regev
When the quality traits of a quality-differentiated product are defined in a binary form, the resulting binary quality price function (BQPF) is shown to be convex. This implies that when many units of the good are sold in a single transaction, marketing it in packages of homogeneous product is more profitable, than in heterogeneous ones. Therefore, if sorting is possible, and relatively inexpensive, it should be undertaken. Another implication of the convexity of the BQPF concerns the case when quality uncertainty of each unit of the product exists at the time of sale. Providing quality guarantee in this case is equivalent to sorting in the former case.

The convexity of the BQPF is tested empirically using data of Israeli export glass-house tomatoes. An estimate of this BQPF has been used to determine actual quality-differentiated transfer prices paid by the single exporting agency to the various growers of this produce. A method of estimating an autoregressive model of the first order with missing observations was developed and utilized in this study and is reported in the Appendix.

Hochman, O. and Regev, U. (1990). THE BINARY QUALITY PRICE FUNCTION: THEORY, EMPIRICAL TESTING, AND APPLICATION TO ISRAELI TOMATO EXPORT. Acta Hortic. 259, 117-138
DOI: 10.17660/ActaHortic.1990.259.10
https://doi.org/10.17660/ActaHortic.1990.259.10