Consumer Sorting and Hedonic Valuation of Wine Attributes: Exploiting Data from a field Experiment
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AGRICULTURAL ECONOMICS Agricultural Economics 47 (2016) 91–103 Consumer sorting and hedonic valuation of wine attributes: exploiting data from a field experiment Christopher R. Gustafsona,∗, Travis J. Lybbertb,DanielA.Sumnerb,c aDepartment of Agricultural Economics, University of Nebraska-Lincoln, 314A Filley Hall, Lincoln, NE, 68583 United States bDepartment of Agricultural and Resource Economics, University of California (UC), Davis, One Shields Ave., Davis, CA 95616, USA cAgricultural Issues Center, University of California, Davis, CA 95616, USA Received 12 December 2014; received in revised form 17 July 2015; accepted 21 July 2015 Abstract This article uses a novel experimental approach to measure consumer willingness to pay (WTP) for wine attributes. We invited customers of a local supermarket who had selected a bottle of wine to purchase to participate in a valuation experiment. Integrating their original wine choice into the experiment, each participant evaluated six alternative wines, generating a rich set of data on willingness to pay and consumer characteristics. The data from the experiment allow us to compare standard shelf price-based wine attribute valuation estimates with estimates using WTP data and an increasing amount of information about individual consumers. The full model employs individual fixed effects to estimate WTP parameters without bias from consumer sorting or supply side influences. Our WTP estimates for wine attributes differ markedly from previous attribute value estimates. Consumers in our sample display clear and stable preferences for wine varieties, but less clear preferences for appellations. Our results suggest caution is needed in using market prices to estimate parameters of the consumer valuation function for product attributes. JEL classifications: C93, D12, L66 Keywords: Willingness to pay; Consumer preferences; Sorting; Experimental Auction; Field Experiment; Hedonic Pricing; Wine 1. Introduction Experimental economic tools facilitate the study of WTP for product attributes by providing control over the choice envi- Economists have used hedonic pricing to study the market ronment and attributes observed by participants. Researchers value of attributes of products including cars, computers, and have used these features in laboratory and field experiments to wine (see, for example, Bajari and Benkard, 2005; Griliches, study consumer WTP for, typically, a small set of attributes.1 1961; Nerlove, 1995, respectively). Analyses of fundamen- While these auctions provide a valuable tool for eliciting WTP tal market conditions—such as consumer willingness to pay from consumers, the ability of these techniques to address data (WTP) for product attributes—are, however, frequently hin- problems related to consumer sorting and omitted variables has dered by a paucity of data. As Oczkowski and Doucouliagos not been fully leveraged. (2014) note, data generated during market transactions do not In this article, we study consumer WTP for wine attributes permit identification of WTP for product attributes. The esti- using data generated in a field valuation experiment combining mation of WTP for attributes is complicated by the fact that the shoppers’ uninfluenced original choice of a bottle of wine with data used in most studies of attribute valuation are a product six alternative wines randomly selected from the store’s inven- of both demand and supply, and may be affected by omitted tory to explicitly address consumer sorting and omitted vari- variables and consumer sorting (Epple, 1987). ables. We connected participants’ WTP for alternative wines, Experimental economics provides a toolset suited to gen- using a full bidding approach, to the shelf price of the origi- erating data not usually available from market transactions. nally selected wine by creating a trade-off between the original ∗ and alternative wines, and collected information on consumer Corresponding author. E-mail address: [email protected] (C. R. characteristics, including demographic and wine choice-related Gustafson). variables. Data Appendix Available Online A data appendix to replicate main results is available in the online version of 1 Lusk and Shogren (2007) provide a thorough overview of experimental this article. auctions studies. See Lusk and Shogren (2007) Table 1.1 for a summary. C 2016 International Association of Agricultural Economists DOI: 10.1111/agec.12212 92 C. R. Gustafson et al./ Agricultural Economics 47 (2016) 91–103 Our experimental design permits us to examine how much ering parameter estimates include quasi-experimental methods people value wine attributes by comparing valuation estimates (Bayer et al., 2007; Black, 1999) and approaches that impose as- derived from commonly available price data to WTP estimates sumed distributions of preferences in the consumer population incorporating an increasing amount of information about con- (Bajari and Benkard, 2005). The problem of identifying de- sumers, culminating in a fixed effects model. Tying consumers’ mand parameters separately from supply parameters in market- uninfluenced wine choices to WTP data in a binding economic generated data is particularly complex for multi-attribute goods experiment provides a unique opportunity to assess consumer because attributes are bundled and in some cases may be diffi- self-selection into market segments, and marginal changes in cult to measure or may be unobserved by the researcher. valuation for alternative products in the product neighborhood. While a large literature on wine valuation exists, authors Naturally, our results apply specifically to wines in the price have infrequently been able to move beyond estimating im- ranges we observed—primarily between $5 and $30—and are plicit marginal price of attributes, though a few argue they are not necessarily applicable to other market segments. able to. Obtaining data from the Swedish state alcohol importer, Valuation estimates for wine attributes change when we use Nerlove (1995) estimated the demand elasticity for wine, argu- WTP, rather than market price, data. Applying standard he- ing that the state monopoly on wine sales resulted in a com- donic models to price data, our estimates for appellation and pletely elastic supply function. Ashenfelter (2008) paired bids grape variety correspond closely to past analyses of wine at- for Bordeaux wines with weather data to predict wine prices and tribute valuation, with premia for prestigious appellations like quality. Gergaud and Ginsburgh (2008) employed auction data Napa Valley and little variation in valuation for grape varieties to examine the effect of natural endowments and technology on (Bombrun and Sumner, 2003). Using WTP rather than price as wine quality. Ashenfelter and Storchmann (2010) studied the the dependent variable begins to erode the high parameter esti- relationship between landscape features and vineyard prices in mates for appellations, but affects grape variety estimates less. Germany to predict the effect of climate change, using the fixed Once we implement the full suite of econometric controls— supply of vineyard sites to identify the relationship between including individual fixed effects—participants appear to have climate and wine attribute valuation. While these latter three stronger preferences among grape varieties than appellations. papers permit observation of a price determined wholly within the context of the auction, additional product attributes such as reputation of the winery or production area may play an 2. Applied hedonic pricing studies important role in valuation (Cross et al. 2011). Much of the consumer-focused wine valuation research eval- Hedonic pricing models are used to estimate the value of uates the effect of expert ratings on purchases or valuation. In attributes external to the good studied, such as the effect of a field experiment, Hilger et al. (2011) posted wine ratings in a access to parks on housing prices, as well as product attributes supermarket and found that for low-priced wines, high ratings bundled in a good, for example the value of an extra year of markedly increased purchases. Friberg and Gronqvist¨ (2012) age for a wine. Both external and bundled attributes have been provided corroborating evidence on the role of wine experts, widely studied. The housing literature has provided estimates finding that positive reviews led sales to peak shortly after the of consumer valuation of externalities such as air pollution review was released. Ali et al. (2008) exploited a change in (Palmquist, 1984) and valuation of goods like school quality one expert’s schedule for releasing wine reviews to estimate the and neighborhood amenities (Bayer et al., 2007; Black, 1999). effect of ratings on pre-release prices in Bordeaux wines. Consumer products examined include cars (Griliches, 1961), Research on wine attribute valuation is primarily dominated breakfast cereal (Stanley and Tschirhart, 1991), wine (Nerlove, by hedonic pricing studies relying on wine publication data. 1995), and personal computers (Bajari and Benkard, 2005). Oczkowski and Doucouliagos (2014) review many of these Though economists frequently use hedonic pricing analysis, the articles in a meta-analysis of the price–quality relationship. At- conditions necessary to move beyond estimation of first-stage, tributes typically examined include grape variety, appellation, implicit attribute prices occur infrequently. vintage, expert rating, and number of cases produced (Bom- The two main issues that researchers must