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Identifying the effect of unobserved quality and expert reviews in the pricing of experience goods: Empirical application on Bordeaux wine

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  • Dubois, Pierre
  • Nauges, Céline

Abstract

We propose a structural empirical approach à la Olley and Pakes (1996) to disentangle the effect of experts' grades from the effect of unobserved quality on the pricing of experience goods. Using a panel data set of 108 châteaux selling wine on the "en primeur" market of Bordeaux, we confirm that experts' grades affect producers' choice of "en primeur" price above the effect of unobserved wine quality. Our empirical results also show that failing to control for endogeneity caused by the omission of unobserved quality leads to over-estimate the influence of experts' grades on the "primeur" price.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 28 (2010)
Issue (Month): 3 (May)
Pages: 205-212

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Handle: RePEc:eee:indorg:v:28:y:2010:i:3:p:205-212

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Web page: http://www.elsevier.com/locate/inca/505551

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Keywords: Experience good Unobserved quality Expert reviews Structural econometrics Wine;

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References

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  1. Whitney K. Newey & James L. Powell, 2003. "Instrumental Variable Estimation of Nonparametric Models," Econometrica, Econometric Society, vol. 71(5), pages 1565-1578, 09.
  2. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-97, November.
  3. Landon, Stuart & Smith, Constance, 1998. "Quality expectations, reputation, and price," MPRA Paper 9774, University Library of Munich, Germany.
  4. Hadj Ali H. & Lecocq S. & Visser M., 2007. "The impact of gurus: Parker grades and en primeur wine prices¤," Working Papers ERMES 0718, ERMES, University Paris 2.
  5. Tirole, J., 1993. "A Theory of Collective Reputations with Applications to the Persistence of Corruption and to Firm Quality," Working papers 93-13, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Ashenfelter, Orley, 2007. "Predicting the quality and prices of Bordeaux wines," Working Papers 37297, American Association of Wine Economists.
  7. David A. Reinstein & Christopher M. Snyder, 2005. "THE INFLUENCE OF EXPERT REVIEWS ON CONSUMER DEMAND FOR EXPERIENCE GOODS: A CASE STUDY OF MOVIE CRITICS -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 53(1), pages 27-51, 03.
  8. Caves, Richard E. & Greene, David P., 1996. "Brands' quality levels, prices, and advertising outlays: empirical evidence on signals and information costs," International Journal of Industrial Organization, Elsevier, vol. 14(1), pages 29-52.
  9. Héla Hadj Ali & Céline Nauges, 2007. "The Pricing of Experience Goods: The Example of en primeur Wine," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(1), pages 91-103.
  10. Victor Ginsburgh, 2003. "Awards, Success and Aesthetic Quality in the Arts," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 99-111, Spring.
  11. Philippe Mahenc, 2004. "Influence of Informed Buyers in Markets Susceptible to the Lemons Problem," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(3), pages 649-659.
  12. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  13. James Levinsohn & Amil Petrin, 2000. "Estimating Production Functions Using Inputs to Control for Unobservables," NBER Working Papers 7819, National Bureau of Economic Research, Inc.
  14. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
  15. Mahenc, Philippe & Meunier, Valerie, 2003. " Forward Markets and Signals of Quality," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 478-94, Autumn.
  16. Landon, Stuart & Smith, Constance, 1997. "The Use of Quality and Reputation Indicators by Consumers: The Case of Bordeaux Wine," MPRA Paper 9283, University Library of Munich, Germany.
  17. Ginger Zhe Jin & Phillip Leslie, 2003. "The Effect Of Information On Product Quality: Evidence From Restaurant Hygiene Grade Cards," The Quarterly Journal of Economics, MIT Press, vol. 118(2), pages 409-451, May.
  18. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
  19. Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November.
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Cited by:
  1. Hadj Ali H. & Lecocq S. & Visser M., 2007. "The impact of gurus: Parker grades and en primeur wine prices¤," Working Papers ERMES 0718, ERMES, University Paris 2.
  2. Franken, Jason R. V. & Bacon, Kevin J., 2014. "Organizational Structure and Operation of the Illinois Wine Industry," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 43(1), April.
  3. Coublucq, Daniel, 2013. "Econometric analysis of productivity with measurement error: Empirical application to the US Railroad industry," DICE Discussion Papers 95, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

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