Geographical Origin and Brand Names in the U.S. Wine Market
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We observe price differences for otherwise similar products based on country or regional origin. Wine prices vary significantly despite very similar sensory quality attributes. For instance, wine from California's Napa Valley typically sells at higher prices than wine of comparable sensory quality from another region. Moreover, brand names increasingly dominate international wine markets despite the importance of geographical origin for wine quality. We explain such observations by positing that brand reputation indicators, variety, and regional origin affect wine purchase decisions. Consumers will pay much higher prices for reputable wines from a well-known producer and/or region because they do not have sufficient information or they are uncertain about wine quality. Given limited attention levels that consumers can expend, not all quality signals receive equal notice. Consequently , we assume that the attention level that consumers pay to positive (negative) quality signals is higher for producers that perform significantly above (below) their average peers. Then, unusually high as well as unusually low quality demonstration form a lasting producer quality signal in the minds of consumers. Expert quality assessments are an important vehicle enabling consumers to learn about the reputation for quality of producers and/or regions. Tirole (1996) presents a model of collective reputation as an aggregate of individual reputations where current producer incentives are affected by their own actions and collective actions of the past. Shapiro (1983) models the effects of individual producer reputation on prices in competitive markets with imperfect information. Improving their knowledge about product quality is costly to consumers. Reputation allows high-quality producers to sell at a premium, which can be interpreted as return on investments in reputation building. In such an imperfect information environment, credible indicators of product quality and reputation can be ...