Unobserved attributes of a product can affect its price.

In modeling consumers' choices among products, it might be impossible to measure all of the relevant attributes of the various products. In the case of cars, for example, the researcher can obtain information about the fuel efficiency, length, width, horsepower, weight, and many other attributes of each car that is offered by manufacturers, but attributes such as comfort, beauty of the design, smoothness of the ride, handling in curves, expected resale value, and prestige cannot be measured directly. Yet the price of the product can be expected to reflect these unobserved (i.e., unmeasured) attributes. There are two reasons why price is affected. First, insofar as the unobserved attributes are costly for the manufacturer, the price of the product can be expected to reflect these costs. Second, insofar as the unobserved attributes affect demand for the product, a price that is determined by the interaction of demand and supply can be expected to reflect these differences in demand. The end result is that price is correlated with unobserved attributes, rather than being independent as we have assumed so far in this book. […]