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Identifying the Effect of Unobserved Quality and Experts' 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 Levinsohn and Petrin (2003) 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 Bordeaux ‘en primeur’ market, we provide some empirical validation for the theoretical result that the price set by wine producers is used as a signal for wine quality. 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 leads to over-estimate the influence of experts’ grades on the ‘en primeur’ price.

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Bibliographic Info

Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 395.

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Date of creation: Jan 2006
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Publication status: Published in International Journal of Industrial Organization, vol.�28, n°3, mai 2010, p.�205-212.
Handle: RePEc:ide:wpaper:4835

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  1. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
  2. GINSBURGH, Victor, . "Awards, success and aesthetic quality in the arts," CORE Discussion Papers RP -1616, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. HélaHadj Ali & Sébastien Lecocq & Michael Visser, 2008. "The Impact of Gurus: Parker Grades and "En Primeur" Wine Prices," Economic Journal, Royal Economic Society, vol. 118(529), pages F158-F173, 06.
  4. George S Olley & Ariel Pakes, 1992. "The Dynamics Of Productivity In The Telecommunications Equipment Industry," Working Papers 92-2, Center for Economic Studies, U.S. Census Bureau.
  5. 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.
  6. James Levinsohn & Amil Petrin, 2000. "Estimating Production Functions Using Inputs to Control for Unobservables," NBER Working Papers 7819, National Bureau of Economic Research, Inc.
  7. 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.
  8. 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.
  9. Ashenfelter, Orley, 2007. "Predicting the quality and prices of Bordeaux wines," Working Papers 37297, American Association of Wine Economists.
  10. 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.
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  13. 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.
  14. 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.
  15. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  16. 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.
  17. Landon, Stuart & Smith, Constance, 1998. "Quality expectations, reputation, and price," MPRA Paper 9774, University Library of Munich, Germany.
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  19. 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.
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Cited by:
  1. 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).
  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. 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.

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