REVISIÓN
The wine hedonic price models in the "Old and New World": state of the art
Modelo de precios hedónicos aplicado al vino del "Viejo y del Nuevo Mundo": estado del arte
María Jimena Estrella Orrego1, 2, Edi Defrancesco1, Alejandro Gennari2
1 Dipartimento Territorio e Sistemi Agro-Forestali (Dept. TeSAF). Università degli Studi di Padova. Viale
dell' Università 16. 35020 Legnaro. Padova. Italy. mariajimena.estrellaorrego@studenti.unipd.it
2 Facultad de Ciencias Agrarias. UNCUYO. Alte. Brown 500. Chacras de Coria. Mendoza. Argentina.
M5528AHB.
Originales: Recepción: 10/01/2012 - Aceptación: 20/03/2012
ABSTRACT
The basic hedonic hypothesis is that goods are valued for their utility-bearing characteristics and not for the good itself. Each attribute can be evaluated by consumers when making a purchasing decision and an implicit price can be identified for each of them. Thus, the observed price of a certain good can be analyzed as the sum of the implicit prices paid for each quality attribute. Literature has reported hedonic models estimates in the case of wines, which are excellent examples of differentiated goods worldwide.The impact of different wine attributes (intrinsic or extrinsic) on consumers' willingness to pay has been analyzed with dissimilar results. Wines coming from "New World" producers seem to be appreciated for different attributes than wines produced in the "Old World". Moreover, "Old and New World" consumers seem to value differently the wine's characteristics. To our knowledge, no cross country analysis has been done dealing with "New World" wines in "Old World" countries, leaving an important gap in understanding underlying attributes influencing buying decisions.
Keywords: Hedonic price model; Wine; Implicit prices.
RESUMEN
La hipótesis hedónica básica es que los bienes son valuados por sus características y no por el bien en sí mismo. Cada una de esas características es evaluada por el consumidor en el momento de decidir la compra por lo que es posible estimar un precio implícito para cada una de ellas. El precio observado de un producto puede ser, entonces, analizado como la suma de los precios implícitos de los atributos que definen el producto. Existe vasta literatura sobre precios hedónicos en el mundo del vino, al tratarse de un caso referente de producto diferenciado. El análisis del impacto de los diferentes atributos del vino sobre la disponibilidad a pagar del consumidor ha reportado resultados disímiles. Los vinos provenientes del "Nuevo Mundo" parecen ser apreciados por atributos diferentes que los vinos del "Viejo Mundo". Adicionalmente, los consumidores del "Nuevo y Viejo Mundo" aprecian distintas características en el vino. A nuestro saber, no se han llevado a cabo análisis de tipo inter-países de vinos del "Nuevo Mundo" vendidos en el "Viejo Mundo". Esta carencia deja una gran brecha en el entendimiento de cuáles son los atributos que influyen en las decisiones de compra del consumidor.
Palabras claves: Modelo de precios hedónicos; Vino; Precios implícitos.
Introduction
The starting point of every hedonic price model is the hedonic hypothesis.
The core of this hypothesis is that each good is characterized by the set of all its
characteristics. A hedonic price function describes the equilibrium relationship
between the economically relevant characteristics of a product and its price. The
price of a good is assumed to be a function of its defining characteristics plus a
random error term. These hedonic prices can be used to predict prices for new goods,
to adjust for quality changes in the price of a good and to measure consumer and
producer valuations of differentiated products (23).
Being wine a highly differentiated product, the hedonic price model suits perfectly
and allows the identification of attributes having the biggest impact in consumers'
willingness to pay. With this information it is possible to build hedonic implicit prices,
allowing producers and intermediates to estimate the impact of product quality or
labelling changes.
Theoretical framework
Even if different authors have worked on the hedonic models estimation (14, 19,
22, 41, 43), two main approaches have contributed greatly towards the theoretical
framework on hedonic prices. The first approach derives from Lancaster's consumer
theory (26), and the second one has been proposed by Rosen (42). Both the approaches
aim to price products attributes, considering them as the elements generating utility
for the consumer.
Lancaster believed that the traditional theory of consumer behaviourwas
inappropriate to explain consumers' utility function.The novelty of Lancaster`s
theory was to introduce the idea that properties and characteristics of a given good
produce utility to consumers. Thus, consumer`s preferences are exercised on good`s
characteristics, and not directly on goods.
The model proposed by Lancaster supposes that each characteristic can be
associated to one or more goods. The utility maximizing consumer decision underlying
the buying decision is:
where U(z) is the consumer utility to be maximized, z isthe vector of i characteristics
(i = 1,....,n) describing a vector of goodsxj (j = 1,....,m). P are the prices of the defined
goods and K is the budget constraint experienced by the consumer and is defined on
the goods-space x. The relationship between the collection of products' characteristics
and the collection of goods available is considered linear. The equation system z = Bx
represents a transformation between goods-space and characteristics-space.
Based on Lancaster´s work, Rosen suggests there are competitive implicit markets
where implicit prices for embodied product attributes are defined and that consumers
evaluate product characteristics when making purchasing decisions. Therefore, the
observed price of a given good is the linear combination of the quality attributes where
the implicit prices are the attributes' weights. Product xj market implicitly reveals a
function Pj = Pj (z1, z2, ..., zn) relating prices P and characteristics z. Rosen supported
his view on the idea that "when goods can be treated as tied packages of characteristics,
observed market prices are also comparable on those terms" (42).
Market equilibrium conditions determine the set of hedonic prices, which are the
implicit prices of attributes for the specific amount of each characteristic -as they are
revealed to economic agents from observed prices-. Rosen estimated intersections of the demand curves of different consumers with varying tastes and the supply functions
of different producers with diverse technologies of production. The implicit estimated
prices for quality attributes provide the implicit marginal valuation that consumers
and producers place on the vector of characteristics. Considering a vector of good´s
characteristics (zj1, zj2, ..., zjn)
where k denotes the consumer's budget constraint and P is the vector of marginal market prices the consumer is willing to pay for the z attributes. The corresponding first-order conditions for a given product j are:
The case of wine
Being wine a highly differentiated product - where grape variety is only one
product's attribute - it seems appropriate to analyze price through the hedonic price
model. Moreover, information about its intrinsic quality is limited until the time of
consumption, so consumers need to use other indicators of the wine's characteristics -
as quality signals -when making purchasing decisions (3). Many authors have estimated
implicit prices of wine attributes through the hedonic approach.
Wine characteristics' selection
The hedonic theory suggests that a characteristic should be included in the
analysis if it influences consumer and producer behaviour. This implicitly assumes that
consumers and producers consider the same set of attributes when they value a good
and this is difficult to sustain. In wine, for example, the consumer may be interested
in winery reputation or information and labelling design while the seller may focus on
chemical attributes or vineyard management. Furthermore, different consumers may
base their purchasing decisions on different sets of characteristics or assign different
weights to them (13). As most products eventually end up in private households, even
though they will pass through a number of intermediate markets on their way from
producer to end user, it seems logical to focus on consumers decisions (24). The
hedonic model also follows this approach and considers those characteristics which
could be important for consumers when making a purchasing decision.
Under the assumption that one can build a unique list of characteristics, for
consumers and producers, these characteristics can be both intrinsic and extrinsic
characteristics. As defined by Mathis et al. (31) it is absolutely necessary that these
characteristics are defined accurately and completely through indicators. Intrinsic
characteristics are the ones bundled in the good and are the essence of the product.
On the other hand, extrinsic characteristics are those influencing consumer´s appreciation of the good but not belonging to the product itself. For the case of wine,
intrinsic characteristics considered in hedonic models are grape-variety; vintage;
alcohol content and other technical quality attributes. An extrinsic characteristic is, for
example, the landscape of a particular wine region such as Chianti or Cafayate or the
jury grade received by a wine.
Following the consumer oriented approach, some authors sustained that technical
quality issues should not be employed in the hedonic price models. In the case of
wine, for example, grape attributes are of primarily interest for grape growers and
winemakers, but could be not so valued by consumers at the moment of the buying
decision because they are not fully known when this information is not provided in
the label. At least, the vast majority of consumers do not have access to information
or knowledge on these technical qualities of grapes and so these may not impact
significantly on their willingness to pay for a certain wine. As defined by Unwin (53) 'when purchasing a particular bottle of wine for the first time, most consumers do not
have any idea at all about the precise level of fine tannins in it, its firmness of attack,
its color intensity...'
Generally, the consumer faces an information problem in his evaluation of the
utility of different products supplied in the market. Getting information about quality is
generally expensive, limiting the willingness of the consumer to search for it. In the
case of wine, this search procedure does not seem appropriate and consumers may
plausibly use other attributes to infer quality. As a signaling factor, reputation could help
to overcome the lack of information of consumers in repeated purchasing decisions.
Reputation is often referred to as the 'goodwill' value of the firm's brand name. For
Stigler 'reputation is a world which denotes the persistence of quality and reputation
commands a price because it economizes search' (51)*.
Shapiro (48) developed a theoretical framework to examine the effects of the
individual producer reputation on prices. The author considered reputation as common
knowledge or public information and as the result of the evaluation a consumer does
on the quality of goods produced by the firm in the past. This information is used as
an indicator of present or future quality.
The main assumption is that all consumers communicate with each other to share
information about products (also through publications), but that such information
necessarily comes with a time-lag. These publications could be wine guides or wine
publications and, in the actual era of internet and social media, also web-pages, blogs
and forums.
Table 1. Search, experience and credence attributes of wine.
Tabla 1. Atributos búsqueda, experiencia y confianza en el caso del vino.
Prices data set selection
The selection of the price data set has been, through all literature, a critical and
controversial aspect. Underlying this choice is the need to collect data over most
quality attributes influencing consumers' willingness to pay. Moreover, prices need to
be as close as possible to the real retail prices in order to get a correct estimation of
attributes' implicit prices.
Through literature, two main approaches have been adopted. Some authors have
built their data set with observed prices and some others have simulated a market
to understand consumers' purchasing decisions. The simulated market approach is
generally adopted when the research goal is to test new product attributes, such as
organic or environmental friendly production processes for agro-food products.
. Observed prices
Observed prices are the ones obtained through surveys on retail markets or
from direct information on the product (catalogues, publications, guides). Sources for
observed prices are diverse and, if we could distinguish them from closest to distant
from the consumer, these would be: retail prices; FOB prices; en primeur prices and
suggested prices.
The retail data set corresponds to the actual identification of market prices at
the retailer. The utility of this type of information relies on offering the real information
consumers face when making purchasing decisions. Whether this information is
gathered through direct surveys or by specialized agencies (such as AC Nielsen)
depends, generally, on the objective of the research and its funding.
Table 2. Wine hedonic models based on observed prices.
Tabla 2. Modelos de precios hedónicos del vino basados en precios observados.
For retail prices, different authors have selected diverse data sources. Many have
chosen AC Nielsen panel data, which generally covers a wide range of retail stores and
with enough detail to estimate an appropriate hedonic function. Others have preferred to
conduct direct surveys, in large-scale retailers, wine shops or in restaurants. A special
case is the one studied by Ortuzar-Gana et al. (38) who decided to build a hedonic price
model considering the "regular price". The regular price is the baseline price which can
be found in the most usual conditions (20) and the authors calculated it by considered
the one standard deviation criterion over the discount percentages options. Underlying
this decision is their idea that 'prices collected from stores may be promotional prices
which are not associated with product's characteristics from the seller's perspective, due
to the objective of selling more items in a limited time period' (38). The authors found the
hedonic estimation based on regular prices performed better (comparing to one based on
current prices) because it displayed a better consumer valuation of each wine attribute.
Recommended prices are the ones suggested by the producer or by a certain
publication or wine guide. These prices are not necessarily found in the market but are
rather the suggestion given by different agents -e. g. producers and wine experts- ,
after some technical quality attributes have been considered. Hence, these prices may
not fully reflect the real of consumers' willingness to pay, because they may not be the
market equilibrium prices.
For recommended prices, two different sources have been used through literature.
The most widely used source has been wine guides or wine publications. This choice
has been generally explained by the data´s accessibility to the wine consuming public
at large. Moreover, as sustained by Ortuzar-Gana et al. (38) these recommended
prices could be useful because they do not take into account the seasonal discounts
and are independent ofthe retailer characteristics.
Even if widely used, wine guides have been considered inappropriate for estimating
hedonic price equations by many authors (7, 11, 21, 54).
. Simulated markets
As consumer behaviour is a complex issue, some authors have considered
useful to work over simulated market data to identify factors influencing consumers'
willingness to pay for a certain good's attribute. Generally, this approach is used to
identify the impact of new attributes in consumers' willingness to pay. This is the case
of experiments set to test new healthy products, functional products or environmentally
friendly production processes.
Gustafson and Sumner (21) developed an experiment in a wine retail setting
with a different approach. After consumers have freely chosen a certain wine, they
were asked to participate in the investigation. Based on their primary wine selection
six different wines were offered to each consumer (a special software was developed
and it created a list of wines based on wines available in the store). This second
wine selection was analyzed using a hedonic approach together with a demographic
questionnaire these consumers completed.
The implicit price of wine attributes
Among the wine quality attributes considered in hedonic models, some show a
relatively stable and uniform performance in different markets and for different time
periods. Some others, on the contrary, show specific positive or negative impacts on
price depending on the considered market.
In this literature review, a distinction will be made considering the origin of the
wine and the selling market.
For this purpose we have classified markets, both origin
and destination, in "Old World" countries and "New World" countries. France, Italy,
Spain, Portugal, Germany, Austria, Switzerland, Belgium, Greece, Bulgaria, Hungary
and Romania will be considered as part of the "Old Word". United States, Australia,
New Zealand, South Africa, Canada, Argentina, Chile, Brazil, Mexico and Uruguay
will be considered the "New World" countries.
As explained by Parcero (40) all countries not included in the "New World" and
the "Old World" are countries with little tradition of wine consumption and practically
inexistent tradition of wine production. However, from 1961 till today they have
significantly increased their imports relatively to the world's total imports of wine.
Among these countries stand out United Kingdom, Denmark, Sweden, Holland, Russia,
Belgium, Japan, China and India. This group of countries is defined as "new buyers"
and will be considered among the "New World" countries.
. "New World" wine in "New World" markets
Most of the hedonic research in the wine market has been done regarding "New
World" wines sold in "New World" countries. These can be possibly explained by the
increasing participation of these actors in the world wine scenario (4).
As described in table 3 (page 215), most hedonic model estimation have found
that 'New World' wines' rating (jury grade), vintage and place of origin have a significant
positive impact on consumer's willingness to pay in "New World" markets.
Table 3. "New World" wines in "New World" markets.
Tabla 3. Vinos del "Nuevo Mundo" en mercados del "Nuevo Mundo".
For place of origin, a strong consensus (32, 44, 50) has risen over the fact that
the more specific the labelling of the place of origin, the higher the price. Moreover, a
positive trend has been distinguished toward more regional differentiation.
The influence of jury grades on consumers' willingness to pay has also raised high
consensus. Most authors have found this variable to have a significant and positive
impact on purchasing decisions. However, the evolution of this impact is subject to
different interpretations.
For instance, Schamel and Anderson (46) identify the winery rating as having
a positive but downward trend while Bicknell et al. (6) found the variable has
increased over time. As could be expected, in United States were Wine Spectator
has the strongest influence and profile, the impact of Parker's grade is consistently
more important.
Vintage has been identify as significantly affecting consumers' buying decisions
but presenting differences for red and white wines, for certain varieties and for different
price-categories.
The role of brands have also been considered thoroughly, specially by
Schamel (46) who argued that "New World" countries have still much work to do in
the regional differentiation but realized leading brands are able to pick up much of
the price differential. The author suggested regional quality leaders could benefit from
emphasizing origin in their own marketing.
. "Old World" wine in "Old World" markets
"Old World" countries, both in production and in consumption, are still the most
important actors in the global wine market. Being Italy, France and Spain the most
important countries, most studies have been done for these wines.
Table 4. "Old World" wines in "Old World" markets.
Tabla 4. Vinos del "Viejo Mundo" en mercados del "Viejo Mundo".
For those studies considering different places of origin as explanatory variables
of the hedonic models, results indicate a strong positive influence. It should be noted
that many studies refer to a special grape producing region. In this cases, place of
origin does not need to be included in the analysis (1, 7, 27, 28).
Panzone and Simoes (39) set an interesting point when referring to the Portuguese
market. They observed that Protected Designation of Origin*** (PDO) labelling is not
a factor attracting a price premium per se, but rather it is the interaction between the
PDO and the region of production that actually gives a premium.
The influence of rating/jury-grade has also raised consensus in these markets.
In this case, however, this variable does not indicate necessarily a present jury grade
but rather a reputation index or a future jury grade. The most notable case is the one studied by Landon and Smith (27) who founded that reputation (built with individual
and collective reputation indexes) has a significant positive impact on price, 20 times
bigger than current quality (measured by present jury-grade).
. "Old World" wine in "New World"
markets
In a scenario of 'New World' countries increasing per-capita consumption and
"Old World" countries reducing it, it seems logical for "Old World" producers to focus
on these more dynamic markets. However, not much research has been done in this
area, only targeting the British Columbia market. In British Columbia, Barbaresco and Barbera brands were found to have a significant impact on consumers' willingness
to pay (17). This impact was found to be positive for some brands and negative for
some others.
For French wines in British Columbia, certain geographical areas were found to
have a significant but different impact on willingness to pay (10). Even if regions are
geographically contiguous, their wines exhibit quality differences due to village geography,
climate, among others. The ranking scheme showed significant positive impact, with
"Premier" and "Grand Cru" designations showing a premium for most wines.
Table 5. "Old World" wines in "New World" markets.
Tabla 5. Vinos del "Viejo Mundo" en mercados del "Nuevo Mundo".
. Mixed situations
An interesting venue has been taken by some authors, aiming at understanding
the whole complexity of a market. In these cases, a single market has been analysed
for worldwide wines origins. In the case of the Swedish market, where a monopoly was
responsible for import, export, production and retail sale of all alcoholic beverages,
rating seems to be the most important variable affecting price. In the United States, the
jury grade plays a key role in defining consumers' willingness to pay. This responds
basically to the market orientation or preference for wine guides such as Wine Spectator.
Table 6. Mixed situations.
Tabla 6. Situaciones combinadas.
Conclusions and research questions
In an economy of highly differentiated products and complex purchasing decisions,
the hedonic price model offers a valid way to identify quality attributes influencing
consumers' marginal willingness to pay and to estimate the implicit price of these
attributes. These estimations provide useful information aiming to improve the
producers' and intermediates' marketing strategies, which can be fine tuned according
to the different products' characteristics and target consumers. Moreover, regional and
national promotional agencies should take advantage of these researches' results in
order to better design their activities in different markets, for diverse types of wines
and wineries.
Up to now, the hedonic price model in wine has been applied in different ways but
all has been done with a single market approach. That is, no cross country research has
been done yet. This has reduced the utility of information for producers and promotional
agencies. No winery or agency deals, nowadays, with a single country and is very
important to understand the different variables influencing different consumers' decision.
The understanding of the "New World" wines' performance in old world countries is
also an unexplored subject. "Old World" countries are still the biggest markets for wine
and it is absolutely necessary to understand which are the attributes influencing their
consumers' decisions. Finding the similarities and differences among these countries
could be tremendously useful for the whole value chain.
* According to Nelson, search is the basic activity for getting information and refers to any way of
evaluating these alternatives, subject to some restrictions: 1- 'the consumer must inspect the option,
2- inspection must occur prior to purchasing' (35). Experience is the information process by which
a consumer purchases brands for consumption and after several purchases determines which
brand he prefers. Credence attributes are 'those which, although worthwhile, cannot be evaluated
in normal use. Instead the assessment of their marginal value requires additional costly information
(...)' (15). Through labelling, experience and credence attributes are transformed into search ones.
** 1984 vintage was excluded from the analysis due to the broker's decision of removing it from the catalogue.
*** An specific European Union regulation intended to guarantee geographical indication related quality.
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