What’s In a Name? Hedonic Pricing for Okanagan Valley Wines

This is a partial re-post (of a paper written by Hannes Edinger, Department of Economics, University of British Columbia, Okanagan. This material is copyrighted and approval was sought before posting.   Mr Edinger is a Master’s of Economics candidate at Queen’s University in Canada.  He is currently living in Ottawa, and actively pursuing Wine/Lifestyle Economics research. He recently presented this paper at the Canadian Economics Association Conference in Quebec and will be  at UC Davis for the American Association of Wine Economists Annual Conference  June 25-28th, 2010.

See the full paper HERE

Abstract
A hedonic pricing function is estimated for wines produced in the Okanagan Valley of British Columbia,Canada. We investigate implicit prices for objective wine attributes, as well as success at a local winefestival. In differentiating wine prices and wine festival success, we focus on the importance of naming, specically, trendy and geographically indicative names, grape appellation, and business association membership. Variables with a statistically signicant impact on wine price include: several objective attributes, vintage characteristics, as well as business association membership of the winery. While some aspects of naming are found to be unimportant with respect to differentiating wine prices, grape names are important, and several naming aspects are important for winning awards, as is business association membership, location, quality certication, and grape variety.

Part I
Introduction

The Okanagan Valley Wine Industry is relatively young; it’s current manifestation is barely twenty years old. Young wine industries must dene, and market themselves in order to compete with well established Old World, and New World wine industries. One method of marketing that has been adopted in New World Wine industries is a departure from traditional appellation in the naming of a winery, a wine or even a grape variety. California’s wine producers exemplify this practice, and wine producers in the Okanagan Valley have caught on. We investigate the marginal impact of naming attributes on the prices of Okanagan Valley Wines, and business association membership (which has been a complex and evolving part of the Okanagan Wine Industry), as well as a traditional vector of explanatory variables to determine which marketing and membership practices are helping wineries fetch higher prices for their products, and which practices are not. Rabkin and Beatty (2007) have investigated the marginal impact of the Vintner’s Quality Alliance (VQA) certication on the bottle of a British Columbia (BC) wine, however to our knowledge, no study has directly
examined Okanagan Valley Wines’ price determinants, nor has any study examined the impact of business association membership, or the subtleties of naming practices on price. We regress price on two continuous variables, and a vector of traditional, and novel dummy variables. We nd that two business associations
provide premia on the price of a bottle of Okanagan Valley Wine, while a third reveives a discount. We cannot identify any signicant effect with respect to naming practices except when a winery chooses to use the grape appellation “Shiraz” instead of “Syrah”  for which we nd a large, and signicant effect. In Part II, we review the history of the Okanagan Valley Wine Industry, including the evolution of the business associations therein. In Part III we briey summarize the background of wine’s hedonic pricing literature, in Part IV we present our empirical estimation and results, in Part V we conclude our discussion.

Part II
History

The Okanagan Valley, located in the interior of British Columbia (BC), Canada produces most of BC’s wine. Wine production in BC is expanding to include Vancouver Island, the Lower Mainland, and even areas north of the Okanagan, however the Okanagan Valley will remain the dominant producer for the foreseeable future.

The current state of the Okanagan wine industry is a response to the 1989 Free Trade Agreement (FTA) and the 1991 North American Free Trade Agreement (NAFTA). Prior to these trade agreements, Okanagan grape and wine producers produced inferior quality table wine for local consumption and low grade grapes for export to wine producers in the United States. The market for low quality table wine produced in the Okanagan persisted as a result of the BC Government’s trade regulation; specically, protectionist tariffs on imported wines and localized subsidies (Kingsbury and Hayter, 2005). Following the 1988 free trade agreement between Canada and the United States, Okanagan grape and wine producers faced an impending wave of superior quality products oered at low prices from the United States. The Okanagan grape and wine industry, and the BC Government, knew that the survival of this industry in the Okanagan rested on a shift to up-market wines. The BC Government intervened to create the British Columbia Wine Institute (BCWI): a business association that de-facto legislated the membership and nancial contributions of BC wine producers (Kingsbury and Hayter, 2005). The BCWI created BC’s own quality certication modeled on a certication established in Ontario, the VQA. This certication has been shown to offer premia on the price of a bottle of BC VQA certied wine (Rabkin and Beatty, 2007). The Okanagan Wine Industry has matured, the importance of the BCWI has diminished, and new business associations have arisen privately (Kingsbury and Hayter, 2005). The Okanagan Valley is colloquially known as “Canada’s California” due to its mild climate, desert-like landscapes, and proximity to water and agriculture, particularly viticulture. This has manifested itself in the Okanagan Wine Industry in several ways: following California’s lead, they have departed from traditional appellations, referenced characteristics of their surroundings in their appellations, and even followed California’s lead in occasionally adopting the Australian appellation of the Syrah grape: Shiraz. While branding the Okanagan “Canada’s California” has served the marketing of the area well, the same does not necessarily hold for the Okanagan Wine industry.

Part III
Background

A good can be considered as a bundle of attributes, and its price the sum of the implicit prices of those attributes. A highly differentiated good that fetches a wide range of prices in a competitive market, like Okanagan wine, is a candidate for a hedonic pricing analysis. Okanagan Wines are an interesting candidate for such an analysis because the Okanagan Wine Industry is a young industry, and as global climate patterns change, and wine production expands into newly receptive regions, many new wine-producing regions will have to face similar challenges in establishing themselves. Knowing how different characteristics of Okanagan Wines are priced may provide useful information for young wine industries in general. Waugh (1929) initiated the quantitative thrust of this type of study; he was able to calculate the implicit
prices for attributes (color, stalk size) of asparagus. Rosen (1974) developed the theoretical framework upon which much of the subsequent hedonic studies have been based. His paper also suggested an identication problem: are the implicit prices of attributes a reection of producer costs or of consumer preferences? Nerlove
(1995) tries to solve this identication problem in his study of the preferences of Swedish wine consumers. The Swedish wine market consists only of imports, and government importers x prices. Nerlove suggests that by using quantity sold as the response variable and treating prices as exogenous, under the conditions of

the Swedish wine market, he could isolate consumer preferences. We argue (like Schamel [2000] and Freeman [1992]) that the identication problem proposed by Rosen and raised by Nerlove does not apply in any signicant way to our study because a large proportion of Okanagan Valley wines are sold in BC (prices are chosen by the BC Liquor Distribution Branch to clear the market, reecting consumer preferences), and in the short run, due to the biological limitations of grape vines, and the various regulatory and scal hurdles that must be overcome, supply is effectively xed. Our argument assumes that the market for Okanagan wines is competitive and near equilibrium. Beyond his suggestions for resolving the identication problem, Nerlove also measures: acidity levels, sugar levels, and several chemical components, for which he nds some signicance with respect to their impact on prices. These objective measures are absent in most of wine’s hedonic pricing literature. The literature tends to disregards these types of chemical measurements for two reasons: because a vector of common objective and sensory attributes largely explain the variation in wine prices, and ultimately wine is an experiential good where consumers must make a purchase decision using attributes that are identiable before consumption. Chemical measurements that inuence taste or cellaring potential are expensive, and they are well proxied by sensory and cellaring potential ratings – ratings for which data are cheap and plentiful. Like many young wine producing regions, the Okanagan produces wines which comprise a segment of the wine market for which cellaring potential is not likely to inuence price. For this reason, we omit this measure in our pricing function. The most well known hedonic study of wine prices is Orely Ashenfelter’s study (1995) on the price of vintage Bordeaux wines. It was made popular by its results and implications: statistical methods can outperform experts in predicting future wine prices. Ian Ayres’ discussion of Ashenfelter’s ndings in Ayres’ book Supercrunchers (2008) and Robert Parker’s vehement denunciations of the use of statistical methods in wine price predictions have both contributed to the popularization of hedonic wine studies. In the Okanagan valley, as it is worldwide, wine is a growing industry of increasing importance. Even as some other agricultural producers in the Okanagan ounder or abandon their crops, wine and grape producers are expanding. While the price determinants of BC wines, and VQA certication specically have been examined (Rabkin and Beatty, 2007) there has been no attempt to identify attributes that differentiate BC wines with respect the nature of their appellation or their business association membership. Estimation of these attributes is missing from the literature in general. While any quantitative or qualitative measure that enters into a wine consumer’s purchase decision is a candidate explanatory variable in a hedonic pricing function, it has been established in the wine literature that objective attributes provide more explanatory power with respect to prices than subjective (experiential) attributes (Lecocq and Visser, 2006). The logic is clear: a consumer is unable to judge, on a first purchase decision, the experiential qualities embodied in the wines they are choosing from, so they must rely on objective qualities that can be gleaned from the wine’s label information, or reputational information that they know a priori. We follow this objective model in this investigation, and we focus on information thatis present on a wine’s label, including the naming information, the wine’s physical presentation (volume), and we include a variable reecting a winery’s performance at a local wine festival to proxy for colloquial reputation.

Conclusion
A hedonic pricing function is estimated for wines produced in the Okanagan Valley of British Columbia. Our model builds on the traditional models (e.g. Lecocq and Visser, 2006) that focus on objective attributes, by including reputation effects, aspects of name choice, and business association membership. While winery name choice is not found to inuence price, it is important in explaining a winery’s reputation score (medal winnings): departures from traditional appellations contribute negatively, while references to the locality contribute positively. Higher reputation ratings do not, on average, contribute to higher wine prices for a winery. Business association (BA) membership is a complex phenomenon in the Okanagan wine industry. In response the NAFTA, the BCWI, a government initiated and supported association, was created to help shift local wine production to up-scale products (Kingsbury and Hayter, 2005). Since then, two other BA’s in the Valley have arisen privately, the ABCW and the OWFS. While VQA certication continues to provide BCWI members with a premium (Rabkin and Beatty, 2007) on VQA certied bottles of wine, on average, wineries

aliated with the BCWI receive a discount while wineries aliated with the ABCW and OWFS receive premia. Interestingly, BA membership is also important in explaining reputation scores. BCWI and OWFS membership contribute positively, while ABCW membership contributes negatively to reputation scores. Location is found to be important for both price and reputation, though the marginal contribution of specic localities can be different (even in sign) with respect to price and reputation. Of particular consequence for local wineries, is a costless decision to label a Syrah grape in the Austrialian tradition: Shiraz – as many Californian wineries do – this creates a 39% discount over a comparable bottle labeled Syrah. Okanagan Valley Wineries, and young wine industries in general, should be cautions in the development of their industry. What has worked for one industry does not necessarily carry over to another, and what creates success at wine competitions does not necessarily create success at the checkout counter. The results of this research imply that a consumer’s purchase decisions with respect to wine are complex. The signicance of naming, awards
and geography suggest that selling wine is about much more than the wine itself, it is about trends and cache. Further investigation into the particularities that differentiate wine prices, beyond the wine itself, would be useful in an effort understand the complex package of attributes that consumers value when they purchase a bottle of wine.

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