Estimation of a hedonic price equation for Luxembourgish wine: do labels matter?

Abstract

The purpose of this thesis is to estimate a hedonic price equation considering the Luxembourgish wine industry in order to assess the impact of labels on the prices of the wines. In other terms, I analyse whether labeled wines earn price premia and are valued by consumers. My research concentrates essentially on the Luxembourgish wine market and I consider the following labels for my analysis: “Charta", “EU organic label", “Bio-Lëtzebuerg", “AOP" and “Domaine et Tradition label". The methodology used to investigate these relations is based on the hedonic pricing model first introduced by Sherwin Rosen (1974), which relates the wine’s attributes to its implicit price. Referring to the empirical results, it is found that labels matter for wines prices: indeed, all the tested labels except for the AOP label implied positive price premia. One argument that can be used to explain why consumers do not value this label is based on the assumption that costs might be so low compared to other labels so that both good and poor wine producers (e.g. wine producers that produce wine of inferior quality) can self-select themselves into this label making it useless. This means that the AOP label is not able to decrease information asymmetry and that the market cannot distinguish between good and poor vintners. Moreover, it is found that stricter label conditions imply higher price premia. Then, over the range of data, it is also found that on average red wines exhibit higher prices than white wines and that independent winemakers achieve higher prices than negotiating producers and cooperative movements such as Domaines Vinsmoselle. Finally, I also show evidence that suggests that wines that appear in the Guide Hachette rating magazine earn a positive price premium.