The Pricing of Experience Goods: The Example ofen primeurWine

Abstract

The market for "primeur" wine in the Bordeaux region allows producers to sell wine that is still in barrels. As with all experience goods, producers send quality signals to uninformed buyers. Using original data on Bordeaux wines, we show that the pricing behaviour of producers depends to a large extent on their reputation, and much less on short-term changes in quality (as measured by experts' grades). We also find that the primeur price has an informative role, since a 10 percent increase in primeur price leads to a 3 percent increase in prices on the market for bottled wine.Keywords: Bordeaux wine, experience good, panel data, quality signal, reputation. Suggested running head:The pricing of en primeur wine While writing this article, Héla Hadj Ali was working as a research fellow at INRA (National Institute for Research in Agriculture), Toulouse (France). Céline Nauges is a senior research fellow at INRA, Toulouse (France).The authors wish to thank Pierre Dubois, Valérie Meunier, Katrin Millock, Michel Simioni, Alban Thomas, Ian M. Sheldon (the editor), Michael Visser, and two anonymous reviewers for their useful comments and suggestions that materially improved the article. The usual caveats apply.-1 -Most food products can be classified as experience goods (Nelson 1970;1974) because their quality can rarely be ascertained before actual consumption.1 A substantial part of the theoretical literature dealing with experience goods has focused on sellers' activity to inform consumers in their purchases, particularly the role of signaling and reputation. Prices, advertising expenditure (Milgrom and Roberts 1986) and warranties (Grossman 1981) are textbook illustrations of how a monopolist can signal the high quality of his product in a game with asymmetric information. Shapiro (1983) emphasized the role of reputation in a perfectly competitive environment by describing how consumers form rational expectations on the quality of experience goods based on the quality of goods produced in the past.In the particular case of food products, producers often choose labeling as a signal of quality. Bureau and Valceschini (2003) showed that labeling helps promote differentiated products and allows small producers to benefit from a well-established collective reputation.More generally, the use of food labels is said to create the potential for price premia (Henneberry and Armbruster 2003).Quantitative measures of these "price premia" are quite rare, as well as, more generally, analyses of the pricing strategy and signaling activity of producers in markets for food products. This is especially the case when compared with hedonic studies that measure the consumers' assessment of food product attributes (see McCluskey and Loureiro 2003, for a review). This article contributes to the empirical literature on experience goods by analysing the pricing behaviour of wine producers from the well-known Bordeaux region in France.Original data on two markets (for "primeur" wine and for bottled wine) provide a unique opportunity to obt...

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