Monday, 20 June 2016

Luxury wines and the relationship of quality to price

In an earlier post I looked at a specific example of the general relationship that seems to exist between the price of a wine and its perceived quality (The relationship of wine quality to price). This turns out to fit what is called an exponential model, so I then used this model to look at how we might make a rational choice about buying wine (Choosing value-for-money wines).

There is one important point that was not covered in these previous blog posts. This is the issue of wines that score very high on the quality scale — their price often seems to have little to do with the prices of other wines.

The data set that I used in those previous posts did not have any very high-scoring wines. This made it very useful as a basic example of the application of the exponential economics model to the relationship between the quality and price of wines. However, we need a different example if we are to look at high-scoring wines.

Luxury goods

The principal issue with high-scoring wines is that it introduces the concept of what are called "luxury goods". These goods, whether they are alcoholic beverages, or clothes, or meals, or accommodation, or transport, or anything else that you can think of, have a price structure that is completely divorced from the price of other goods, except than that the luxury goods will always coast a lot more money than you and I can afford.

An obvious example is flying first class on a plane. You arrive at your destination at the same time as everyone else on the plane, having departed at the same time as well, but you pay 3-4 times as much money. Obviously, you are not paying for the transportation itself. Instead, you are paying for a more luxurious experience while travelling.

So, for luxury goods we pay for what is called "brand prestige". For wine, this is also called "label drinking" — you can actually pay more for the label on the bottle than you do for the bottle's contents. James Bond (secret agent 007) is the best-known example of the sort of person who specifies labels rather than contents when ordering a drink.

This means that there are two relationships between quality and price when we are looking at wines — the first divides the wines into two groups (luxury versus the rest), and the second then describes the relationship between quality and price within each of those two groups separately.

I will illustrate these concepts with a specific example. As in the previous post (The relationship of wine quality to price), I need to pick a particular grape variety and geographical region, as the relationship of quality to price can vary between varietals and regions.

An example

The example data set I will use is the en primeur prices for some of the red wines of Bordeaux for the 2004 vintage. These are the initial prices set by the wineries, before the wines are bottled (also called "futures" or "subscription" prices). I will compare these prices to the average quality scores of several of the media critics who sampled the wines before bottling.

It is important to pick a vintage before 2005, because that was the year when the modern world of outrageous Bordeaux red-wine prices began. This was hailed as the best vintage for 30 years or more; and the quality : price ratio changed with that vintage, never to return to its old existence. I will discuss this in a future blog post.

The en primeur assessment scores are "barrel scores", since they are produced while the wine is still aging in the wooden barrels. They indicate the potential quality of the wine. A "bottle score" will be produced later, when the wines are finally bottled, after another year or so in the barrels. The latter scores may increase or decrease relative to the barrel scores.

It is worthwhile to use a composite quality score from several critics. These wine assessors have different ratings scales, and each one uses their scale in a different way compared to the others (see, for example, Who Tosses Around the 90 Point Ratings More Casually?). Furthermore, these experts notoriously do not always agree with each other over particular wines, although in general there is usually a consensus opinion about the relative qualities of the world's wines. For Bordeaux wines, these issues have been discussed by Robert Ashton, by Domenic & Arnie Cicchetti, and by Jean-Marie Cardebat, Jean-Marc Figuet & Emmanuel Paroissien (see the Reference list at the bottom of the post).

So, the quality : price relationship can sometimes differ between assessors; and it is worthwhile to avoid this difference if possible.

Fortunately, the issue of combining assessor scores has been studied for Bordeaux red wines by Jean-Marie Cardebat & Emmanuel Paroissien (see the Reference list). So, I can simply use their "affine" mathematical formulae to convert each assessor's scores to the same scale, which is the one used by Robert Parker. A composite score can then be calculated as the average of these transformed scores. (Note: this is quite different from averaging the scores of a panel of people tasting together.)

The data

I sourced the data from Bolomey Wijnimport's bordOverview web site. This interesting site has compiled the en primeur prices for the main Bordeaux regions for every vintage since 2004. It has also compiled the corresponding quality scores from a range of commentators around the world, measured on whatever scale each assessor has used.

The wines used in my data set come from the so-called Left Bank of the Bordeaux region, which includes the Médoc, Haut-Médoc and Pessac-Léognan (Graves) sub-regions. At the time I downloaded the 2004 data (September 2007) there were quality scores from up to seven different assessors. I used all of the wines for which there were scores from at least 3 of the 7 assessors, plus a stated price (in euros). This provided a data set of 106 wines, as shown in the first graph.


Each wine is represented by a single point in the scatterplot, located according to its quality score (horizontally) and price (vertically). The blue points represent the "normal" wines, with the five luxury wines in red.

The points are scattered a good deal, indicating a lot of variation in wine price for any given quality score. This presumably reflects the myriad of different influences on wine quality and wine price, which can act independently of each other. Nevertheless, the points are much less scattered than we saw for the chardonnay data in the earlier blog post (The relationship of wine quality to price). This is a result of averaging the scores from several assessors, which reduces the spread of the points horizontally across the graph.

The luxury wines in this dataset are the five premiers crus classé (first growth) châteaux (in order of decreasing score: Latour, Margaux, Lafite-Rothschild, Haut-Brion, and Mouton-Rothschild). There are also two wannabe luxury wines in the data set, whose points are well above the main group of non-luxury wines. These are Château La Mission Haut-Brion and Château Palmer — La Mission Haut-Brion has consistently had high prices, as indicated by The Liv-ex Bordeaux Classification, although Palmer is usually somewhat cheaper.


As I did for the chardonnay data in the earlier blog post (The relationship of wine quality to price), I can fit the exponential (log-linear) economic model to the non-luxury wines. This produces the summary curve shown in the second graph. In this case, 64% of the variation in wine price is related to wine quality, which is much greater that we saw for the chardonnay data. This is thus a very good-fitting model.

Since there are only five luxury wines in this dataset, almost any model will fit the data. (However, see the next post: The cost of luxury wines.) So, I have simply shown a dashed straight line on the graph for these wines. Note that the two wannabe luxury wines do not really fit either of the two lines on the graph.

Since the model fit is good, we can now consider the matter of choosing a non-luxury wine based on this dataset, using the ideas presented in my post: Choosing value-for-money wines.


For wines of < US$ 20 (=€18), which are the ones below the pink line on the third graph, the wines have quality scores in the range 75–85. This is not very good value for money, at least on a global scale — I can easily get better-quality wines for this price. It might, however, be a good quality : price range for Bordeaux wines!

For wines of US$ 20–30 (=€18–27), which are between the pink and green lines on the graph, the wines have scores in the 80–88 range. This is still very poor value compared to the chardonnay dataset, with wines from the USA. Indeed, a score of 88, which I have suggested would indicate a good-quality wine, means paying a price of at least €29 (US$ 32).

Needless to say, I did not buy any of the 2004 Bordeaux en primeur red wines.



References

Robert H. Ashton (2013) Is there consensus among wine quality ratings of prominent critics? An empirical analysis of red Bordeaux, 2004–2010. Journal of Wine Economics 8:225-234.

Jean-Marie Cardebat, Jean-Marc Figuet, Emmanuel Paroissien (2014) Expert opinion and bordeaux wine prices: an attempt to correct biases in subjective judgments. Journal of Wine Economics 9:282-303.

Jean-Marie Cardebat, Emmanuel Paroissien (2015) Reducing quality uncertainty for Bordeaux en primeur wines: a uniform wine score. American Association of Wine Economists Working Paper No. 180.

Domenic V. Cicchetti, Arnie F. Cicchetti (2013) As wine experts disagree, consumers’ taste buds flourish: how two experts rate the 2004 Bordeaux vintage. Journal of Wine Research 24:311-317.

Dom Cicchetti, Arnie Cicchetti (2014) Two enological titans rate the 2009 Bordeaux wines. Wine Economics and Policy 3:28-36.

Literature on Bordeaux Wine Prices

Orley Ashenfelter (2008) Predicting the quality and prices of Bordeaux wine. Economic Journal 118:F174–F184.

Jean-Marie Cardebat, Jean-Marc Figuet (2004) What explains Bordeaux wine prices? Applied Economics Letters 11:293-296.

Pierre Combris, Sébastien Lecocq, Michael Visser (1997) Estimation of a hedonic price equation for Bordeaux wine: does quality matter? Economic Journal 107:390-402.

Elroy Dimson, Peter L. Rousseauc, Christophe Spaenjers (2015) The price of wine. Journal of Financial Economics 118:431-449.

Pierre Dubois, Céline Nauges (2005) Identifying the effect of unobserved quality and experts’ reviews in the pricing of experience goods: empirical application on Bordeaux wine. Working Paper, University of Toulouse.

Philippe Février, William Roos, Michael Visser (2005) The buyer’s option in multi-unit ascending auctions: the case of wine auctions at Drouot. Journal of Economics & Management Strategy 14:813-847.

Héla Hadj Ali, Céline Nauges (2007) The pricing of experience goods: the example of en primeur wine. American Journal of Agricultural Economics 89:91-103.

Héla Hadj Ali, Sébastien Lecocq, Michael Visser (2008) The impact of gurus: Parker grades and en primeur wine prices. Economic Journal 118:F158-F173.

Ira Horowitz, Larry Lockshin (2002) What price quality? An investigation into the prediction of wine-quality ratings. Journal of Wine Research 13:7-22.

Gregory V. Jones, Karl-Heinz Storchmann (2001) Wine market prices and investment under uncertainty: an econometric model for Bordeaux crus classés. Agricultural Economics 26:115-133.

Stuart Landon, Constance E. Smith (1998) Quality expectations, reputation, and price. Southern Economic Journal 64:628-647.

Philippe Mahenc, Valérie Meunier (2006) Early sales of Bordeaux grands crus. Journal of Wine Economics 1:57-74.

Philippe Masset, Jean-Philippe Weisskopf, Mathieu Cossutta (2015) Wine tasters, ratings, and en primeur prices. Journal of Wine Economics 1:75-107.

Tim Noparumpa, Burak Kazaz, Scott Webster (2015) Wine futures and advance selling under quality uncertainty. Manufacturing & Service Operations Management 17:411-426.

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