Abstract This paper sketches a model of product differentiation according to the hedonic hypothesis that is based on the theory of consumer behavior of Lancaster (1971). Lancaster suggested that utility is derived from the characteristics of the good and not the good itself. Thus, from the perception of the consumer, every characteristic has a price. This is the hedonic (or implicit) price. We have estimated implicit price and quality changes of Iranian car market for the years 2005 to 2010. The empirical results indicate that during this period the safety variables (types of airbags and brakes) have been the most important variables affecting the price of automobile, and also the changes in the quality of new automobiles sold in Iran have been responsible for price increases of about 47% during this period.