January 13th, 2015
Can a wine drinker judge the quality of a bottle by its price? The nature of this relationship has always been contested.
We expect that consumers are willing to pay more for higher quality wines, while higher quality wines typically cost much more to produce. Some studies have identified that better quality wines do in fact sell for higher prices, others have not.
Fundamentally, it is the subjective nature of wine quality assessment and the lack of quality information held by consumers which potentially drives a wedge between price and its quality.
Even though expert wine tasters are able to provide a sensory evaluation of a wine’s characteristics, evaluation is subjective and different tasters often maintain different opinions for the same wine.
Further, wine is often argued to be an “experience good” - which means that consumers need to purchase and consume the good first to evaluate it. This subjective nature of wine evaluation and the inability of consumers to know what’s in the bottle before consuming it means that the pricing of wines according to some measure of quality may prove particularly difficult.
To explain how wine prices differ statistical models have been developed to examine the relationship between wine price and its quality and a series of other factors thought to influence prices. These statistical models are called hedonic price functions. These hedonic functions recognise that price depends upon both demand and supply factors and are employed generally for differentiated goods, such as houses, personal computers and cars. For wine, hedonic price functions statistically estimate the relationship between prices and measures of a wine’s quality, reputation, variety, region, vintage, and other factors, (see Oczkowski (1994)) for one of the seminal wine studies.
In an attempt to shed light on the price-quality debate, Chris Doucouliagos and I have recently undertaken a meta analysis of the relation between wine prices and quality ratings. The purpose of a meta analysis is to summarise previously published results from studies and make general conclusions of the major findings of a body of literature.
The meta analysis examined more than 180 hedonic wine price models developed over 20 years covering many countries. The research identifies that the relation between the price of wine and its sensory quality rating is a moderate partial correlation of +0.30. This correlation is positive and statistically significant in approximately 90% of cases. In other words, approximately 90% of models estimated in the literature identified that the positive relation between prices and quality is not due to chance.
The findings from the meta-analysis indicate, however, that the correlation between price and its quality is not perfect. That is, some wines are over-priced compared to quality, others may be under-priced. This recognition suggests some important implications for both wine producers and consumers.
For wine producers specific pricing strategies to follow will depend on the quality of the wines produced and the nature of competition that producers face in the market. For example, some low quality producers may be able to charge higher prices than implied by quality, in the short term, as buyers may find it uneconomic to conduct the necessary search to identify quality.
In other words, some consumers may be fooled by higher prices inferring higher quality, and pay higher prices than they really should. This deception may only occur for a short period of time as consumers become more aware of the wine’s quality over time. Alternatively, high quality producers may seek to charge higher prices than suggested by the wine’s quality level given that low-quality producers cannot sustainably follow a similar strategy.
For consumers, the results imply that price may or may not infer quality. In other words, consumers should be wary of using price as a sole indicator of a wine’s quality. This implies that better informed buyers could potentially identify bargains in the short run. In this context expert wine guides potentially play an important role and I have developed a web-based tool called the Australian Wine Price Calculator to help identify under and over-priced wines.
The question naturally arises, if wine experts differ in their opinions of a wine, what does a consumer do? Wine expert Jancis Robinson suggests that individual consumers may wish to follow the “preferences and prejudices” of a specific wine critic in making wine purchase choices.
The moderate price-quality correlation identified across numerous studies occurs despite the lack of information held by consumers about a wine’s quality and the inconsistency of expert tasters when evaluating wines. Despite all this, it can be argued that quality still does matter.