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Efficient Wine Pricing Using Stochastic Frontier Models

Published online by Cambridge University Press:  16 September 2019

Harold O. Fried  and
Loren W. Tauer
Harold O. Fried
Affiliation:
Department of Economics, Union College, Lippman Hall, Schenectady, NY 12308; e-mail: friedh@union.edu.
Loren W. Tauer
Affiliation:
Charles H. Dyson School of Applied Economics and Management, Cornell University, Warren Hall, Ithaca, NY 14850; e-mail: lwt1@cornell.edu.
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Abstract

We specify a two-tier stochastic frontier model to estimate a price equation for U.S. Rieslings and determine overpricing and underpricing of specific wines. The data is for 2000–2016. Using tasting score and tasting score squared as sole independent variables, we found evidence of overpricing and underpricing of wines. When additional location variables were entered, empirical estimates for this two-tier model were infeasible, suggesting that both underpricing and overpricing did not occur simultaneously in this market. Separate one-sided stochastic frontier models were then specified and estimated to test for either under or overpricing in this market. Results showed that overpricing exists and not underpricing, but the extent of overpricing is minor, suggesting that wineries do an efficient job pricing their wines, given tasting scores, conditional on regional location premiums or discounts. We also investigated the effect of scale on pricing for a smaller set of wineries. (JEL Classifications: C4, D4, Q1)

Keywords

hedonic pricingRieslingstochastic frontiertwo-tier modelwine
Type
Articles
Information
Journal of Wine Economics , Volume 14 , Issue 2 , May 2019 , pp. 164 - 181
Copyright
Copyright © American Association of Wine Economists 2019 

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Footnotes

The authors thank the editor Karl Storchmann and reviewer for their comments. We also thank Jung-Jen Wang for providing the Stata code to estimate the two-tier model and Anvita Khosla for help in downloading the data.

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