Hostname: page-component-78c5997874-ndw9j Total loading time: 0 Render date: 2024-11-18T01:22:04.284Z Has data issue: false hasContentIssue false
  • English
  • Français

Efficient Wine Pricing Using Stochastic Frontier Models

Published online by Cambridge University Press:  16 September 2019

Harold O. Fried  and
Loren W. Tauer
Harold O. Fried
Affiliation:
Department of Economics, Union College, Lippman Hall, Schenectady, NY 12308; e-mail: [email protected].
Loren W. Tauer
Affiliation:
Charles H. Dyson School of Applied Economics and Management, Cornell University, Warren Hall, Ithaca, NY 14850; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

We specify a two-tier stochastic frontier model to estimate a price equation for U.S. Rieslings and determine overpricing and underpricing of specific wines. The data is for 2000–2016. Using tasting score and tasting score squared as sole independent variables, we found evidence of overpricing and underpricing of wines. When additional location variables were entered, empirical estimates for this two-tier model were infeasible, suggesting that both underpricing and overpricing did not occur simultaneously in this market. Separate one-sided stochastic frontier models were then specified and estimated to test for either under or overpricing in this market. Results showed that overpricing exists and not underpricing, but the extent of overpricing is minor, suggesting that wineries do an efficient job pricing their wines, given tasting scores, conditional on regional location premiums or discounts. We also investigated the effect of scale on pricing for a smaller set of wineries. (JEL Classifications: C4, D4, Q1)

Keywords

hedonic pricingRieslingstochastic frontiertwo-tier modelwine
Type
Articles
Information
Journal of Wine Economics , Volume 14 , Issue 2 , May 2019 , pp. 164 - 181
Copyright
Copyright © American Association of Wine Economists 2019 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

The authors thank the editor Karl Storchmann and reviewer for their comments. We also thank Jung-Jen Wang for providing the Stata code to estimate the two-tier model and Anvita Khosla for help in downloading the data.

References

Aigner, D., Lovell, K., and Schmidt, P. (1977). Formulation and estimation of stochastic frontier production function models. Journal of Econometrics, 6(1), 21–37.Google Scholar
Ashenfelter, O. (2008). Predicting the prices and quality of Bordeaux wine. Economic Journal, 118(529), 40–53.Google Scholar
Ashenfelter, O., and Jones, G. (2013). The demand for expert opinion: Bordeaux wine. Journal of Wine Economics, 8(3), 285–293.Google Scholar
Benjamin, B. A., and Podolny, J. M. (1999). Status, quality, and social order in the California wine industry. Administrative Science Quarterly, 44(3), 563–589.Google Scholar
Bidmead, W. (2012). Wine pricing in the United States. In Özer, O. and Phillips, R. (eds.), The Oxford Handbook of Pricing Management, 1–16. New York: Oxford University Press.Google Scholar
Blanco, G. (2017). Who benefits for job placement services? A two-sided analysis. Journal of Productivity Analysis, 47(1), 33–47.Google Scholar
Caudill, S. B., and Ford, J. M. (1993). Biases in frontier estimation due to heteroskedasticity. Economics Letters, 41, 17–20.Google Scholar
Caudill, S. B., and Mixon, F. G. Jr. (2016). Estimating class-specific parametric models using finite mixtures: An application to a hedonic model of wine prices. Journal of Applied Statistics, 43(7), 1253–1261.Google Scholar
Chen, K-J., and McCluskey, J. J. (2018). Impacts of expert information on prices for an experience good across product segments: Tasting notes and wine prices. Journal of Agricultural and Resource Economics, 43(3), 388–402.Google Scholar
Combris, P., Lecocq, S., and Visser, M. (1997). Estimation of a hedonic price equation for Bordeaux wine: Does quality matter? The Economic Journal, 107(441), 390–402.Google Scholar
Constanigro, M., McCluskey, J. J., and Mittelhammer, R. C. (2007). Segmenting the wine market based on price: Hedonic regression when different prices mean different products. Journal of Agricultural Economics, 58(3), 454–466.Google Scholar
Dubois, P., and Nauges, C. (2010). Identifying the effect of unobserved quality and expert reviews in the pricing of experience goods: Empirical application on Bordeaux wine. International Journal of Industrial Organization, 28(3), 205–212.Google Scholar
Kumbhakar, S. C., and Knox Lovell, C. A. (2000). Stochastic Frontier Analysis. Cambridge: Cambridge University Press.Google Scholar
Kumbhakar, S. C., and Parmeter, C. F. (2009). The effects of match uncertainty and bargaining on labor market outcomes: Evidence from firm and worker specific estimates. Journal of Productivity Analysis, 31(1), 1–14.Google Scholar
Kumbhakar, S. C., Wang, H.-J., and Horncastle, A. P. (2015). A Practitioner's Guide to Stochastic Frontier Analysis using Stata. New York: Cambridge University Press.Google Scholar
Lancaster, K. J. (1966). A new approach to consumer theory. Journal of Political Economy, 74, 132–156.Google Scholar
Landon, S., and Smith, C. (1997). The use of quality and reputation indicators by consumers: The case of Bordeaux wine. Journal of Consumer Policy, 20, 289–323.Google Scholar
Oczkowski, E., and Doucouliagos, H. (2014). Wine prices and quality ratings: A meta-regression analysis. American Journal of Agricultural Economics, 97(1), 103–121.Google Scholar
Perrouty, J. P., d'Hauteville, F., and Lockshin, L. (2006). The influence of wine attributes on region of origin equity: An analysis of the moderating effect of consumer's perceived expertise. Agribusiness, 22(33), 323–341.Google Scholar
Polachek, S. W., and Yoon, B. J. (1987). A two-tier earnings frontier estimation of employer and employee information in the labor market. The Review of Economics and Statistics, 69(2), 296–302.Google Scholar
Rosen, S. (1974). Hedonic prices and implicit markets: Product differentiation in pure competition. Journal of Political Economy, 82(1), 34–55.Google Scholar
Schamel, G., and Anderson, K. (2003). Wine quality and varietal, regional and winery reputations: Hedonic prices for Australia and New Zealand. The Economic Record, 79(246), 357–369.Google Scholar
Schnabel, H., and Storchmann, K. (2010). Prices as quality signals: Evidence from the wine market. Journal of Agricultural & Food Industrial Organization, 8(1), Article 2.Google Scholar
Steiner, B. E. (2004). Valuing labeling attributes with hedonic price analysis: Australian wines in the British wine market. Agribusiness, 20, 287–307.Google Scholar
Storchmann, K. (2012). Wine economics. Journal of Wine Economics, 7(1), 1–33.Google Scholar
Storchmann, K., Mitterling, A., and Lee, A. (2012). The detrimental effect of expert opinion on price-quality dispersion: Evidence form the wine market. American Association of Wine Economics, Working Paper No. 118, August. Available from http://www.wine-economics.org/aawe/wp-content/uploads/2012/10/AAWE_WP118.pdf.Google Scholar
Waugh, F. V. (1928). Quality factors influencing vegetable prices. Journal of Agricultural Economics, 10(2), 185–196.Google Scholar
Xu, H., Wang, H., Zhou, C., and Geng, Z. (2016). Dual attributes of government intervention and China's real estate prices – Is Chinese government a promoter of the real estate prices. Accounting and Finance Research, 5(3), 29–36.Google Scholar
Zhang, H., Zhang, J., Yang, Y., and Zhou, Q. (2017). Bargaining power in tourist shopping. Journal of Travel Research, 57(7), 947–961.Google Scholar