Product characteristics and reputation effects in the wine market

Abstract

This dissertation analyzes the relationships between wine attributes and prices, with a focus on reputation effects. Contributions are made in the fields of industrial organization and econometrics, developing a model of firm behavior in the presence of collective and individual reputation incentives, and a technique broadly applicable to the task of estimating class-specific parametric models in the presence of class uncertainty. Data from California and Washington wines are analyzed. In a dynamic optimization framework, a theoretical model analyzes the firm's choice in maximizing the present value of its profits in a market in which the return of investing in quality is two-fold: collective (associated with the region of production) and firm reputation (associated with the brand or label). The results indicate that markets with fewer firms with both collective and firm reputation are conducive to the highest levels of quality.; The empirical part of the dissertation analyzes the effect of wine attributes on prices using hedonic models, while taking account of extreme product heterogeneity. It is hypothesized that multiple product classes exist. To identify and estimate class-specific hedonic models, two approaches are taken. The first approach uses price to segment the wine market, while the second uses all information to segment the market. In the price segmented model, accounting for multiple wine classes results in a greater ability to explain the variability in the data and produces more accurate and interpretable results regarding the implicit prices of the attributes. For the latter application, an innovative econometric technique is developed. First, a hedonic model for wine is estimated nonparametrically via local polynomial regression. Differences in the hedonic function across neighborhoods of data reflect changes in the underlying supply and demand functions. Data are then aggregated into groups of observations that share functionally similar estimates of the (local) hedonic functions. In this way, wine segments are endogenously determined on the basis of similarities in market equilibria. Using this methodology, four differentiated wine markets are identified: commercial, semi-premium, premium, and ultra-premium. Finally, parametric hedonic functions specific to each wine class are estimated, revealing significant differences in implicit prices of the attributes across classes.

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