Wine Prices

Segmenting the Wine Market Based on Price: Hedonic Regression when Different Prices mean Different Products

Marco Costanigro, Jill J. McCluskey and Ron C. Mittelhammer

Work in progress

*Costanigro: Ph.D. candidate, School of Economic Sciences, Washington State University; McCluskey (corresponding author): Associate Professor, School of Economic Sciences, Washington State University; Mittelhammer: Regents Professor, School of Economic Sciences and Department of Statistics, Washington State University, Pullman, WA; The authors with to thank without implicating Jon Yoder for helpful discussion.

Segmenting the Wine Market Based on Price: Hedonic Regression when Different Prices mean Different Products

Abstract It can be argued that the price of wine embodies characteristics that differentiate the product. It follows that many consumers use price as a signal of quality. Many economists have estimated hedonic price functions for wine. However, estimating a single hedonic price function imposes the assumption that the implicit prices of each attribute are the same across price categories. The objective of this paper is to determine appropriate structural breakpoints in wine prices that segment the market into prices categories and test whether the impact of specific wine attributes on price are different across price categories. We confirm that implicit prices for attributes differ across these price categories. We conclude that at least two different wine classes exist: “consumption wines” and “collectible wines.” We argue that these classes identify separate products that fulfill different needs and should be considered separately.

Key Words: Hedonic regression, wine, price segmentation, structural breaks

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Introduction

A basic question often left in the background in the wine economics literature is how consumers actually select the wines they purchase. In the marketing literature, Spawton (1991) identifies four different categories of wine...