Aleksey Tetenov (Collegio Carlo Alberto)

“Price as a signal of product quality: experimental evidence from wine tastings”

Abstract:
We study the determinants of the choice between wines in wine tasting experiments where about 200 nonprofessional tasters were asked to indicate which one of the tasted wines they preferred and which one they would buy. In addition to actually tasting several wines, which differ in terms of their intrinsic quality, tasters were randomly given fictitious information about their price and the environment where the grapes were grown and the wines produced. We exploit the randomness of these signals to weigh their importance relative to the intrinsic quality of the wine using a random utility model. The model combines separate information on which wine the tasters prefer and which one they would buy to identify the signaling value of price. We are able to separate the positive signaling effect of price from its negative e ect through the budget constraint. Consistent with Wolinsky (1983) and Milgrom and Roberts (1986), we find that tasters use price as a signal about the quality of the product.