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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. James Levinsohn & Amil Petrin, 2000. "Estimating Production Functions Using Inputs to Control for Unobservables," NBER Working Papers 7819, National Bureau of Economic Research, Inc.
  2. Ali, Hela Hadj & Lecocq, Sebastien & Visser, Michael, 2007. "The Impact of Gurus: Parker Grades and EN PRIMEUR Wine Prices," Working Papers 37292, American Association of Wine Economists.
  3. 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.
  4. Mahenc, Philippe, 2004. "The Influence of Informed Buyers in Markets Susceptible to the Lemons Problem," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
  5. Ashenfelter, Orley, 2007. "Predicting the quality and prices of Bordeaux wines," Working Papers 37297, American Association of Wine Economists.
  6. Tirole, Jean, 1996. "A Theory of Collective Reputations (with Applications to the Persistence of Corruption and to Firm Quality)," Review of Economic Studies, Wiley Blackwell, vol. 63(1), pages 1-22, January.
  7. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
  8. Hadj Ali, Héla & Nauges, Céline, 2007. "The Pricing of Experience Goods: The Case of En Primeur Wine," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
  9. 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.
  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. 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.
  12. 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.
  13. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
  14. 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.
  15. 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.
  16. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  17. Landon, Stuart & Smith, Constance, 1998. "Quality expectations, reputation, and price," MPRA Paper 9774, University Library of Munich, Germany.
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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.

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