Quality differentiation in wine markets

Nan Yang

doi:10.7273/000006194

This dissertation consists of three studies that investigate how quality and reputation factors affect the wine market. The models elicit consumer preferences and describe how intrinsic product characteristics, objective properties, and location interactions among wineries affect market prices. The first study evaluates how sensory properties of Washington State red wines affect consumers' willingness to pay using data from individual level tasting and laboratory measurements. A consumer-preference model serves as a benchmark and three intensity models (consumer-intensity, trained-panel and instrumental measurement) are estimated and compared to quantify sensory effects. The results suggest that astringency has a mostly positive effect, while bitterness has a negative effect. Comparing the accuracy of the three models, the consumer-preference model is the most accurate in predicting consumers' willingness to pay and the instrumental-measurement model is the next best, followed by trained-panel model, and the consumer-intensity model. The second study investigates how organic classifications affect wine prices and whether organic classification interacts with other product characteristics. The organic classification includes wine is made from organic grapes and "organic handling wine" that is produced via organic methods, which prohibit the usage of artificially derived preservatives, such as sulfites. The hedonic price model is applied to analyze the wine data. The results suggest that organic grape wines command a premium, and organic handling wines sell at discount. Further, the results indicate that estate grown wines obtain an additional premium when selling organic grape wines. In the third study, the spatial relationships between wineries and wine market values are analyzed. The research question is that whether good neighbors of a winery have positive effects on its own product price. Winery-level data with geographic information system (GIS) coordinates are utilized to understand the spatial relationships among neighboring wineries. Spatial effects for the California and Washington wine industries are examined by performing clustering tests based on wine prices and tasting scores. A spatial lag model is then estimated to test the hypothesis that there are positive effects from neighbors when analyzing the hedonic price equations. The regression results indicate that there exists strong and positive neighbor effect.

Quality differentiation in wine markets

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