There is a study by some economists and statisticans on the correlation between the price of a wine and ratings in blind tastings by tasters who are not informed of the price. The headline result in the paper is that higher priced wines don’t get higher ratings. If anything they get lower ratings. It is typically used in the first paragraph of blog posts to set up various theories about how people use price information to tell themselves what they should and shouldn’t like. (For example, here’s Jonah Lehrer.)
But why should we expect higher priced wine to get higher ratings in tastings? Suppose there are 100 different styles of wine and for every different style there is a group that likes that style and only that style. There will be a lot of variation in the price of different styles because the price will depend on the supply of that style and the size of the group that likes that style. Now ask a person to taste a randomly selected wine and rate it. There will be no correlation between price and ratings.
There are many styles of cheese with different prices. Would we expect the price of cheese to predict ratings in blind tastings?
Here’s another variation on the same idea. Suppose there are just two styles of wine, subtle and not-so-subtle. Some people appreciate the subtlety but most don’t. Suppose that the supply of subtle wine is lower so that its price is higher. Then again a study like this will produce an overall negative correlation between price and ratings.
And indeed if you read past page 3 of the paper you see that an effect like this is in the data.
Our data also indicates that experts, unlike non-experts, on average assign as high – or higher – ratings to more expensive wines. The coefficient on the expert*price interaction term is positive and highly statistically significant. The price coefficient for non-experts is negative, and about the same size as in the baseline model. The net coefficient on price for experts is the sum of these two coefficients. It is positive and marginally statistically significant.
The linear estimator offers an interpretation of these effects. In terms of a 100 point scale (such as that used by Wine Spectator), the extended model predicts that for a wine that costs ten times more than another wine, non-experts will on average assign an overall rating that is about four points lower, whereas experts will assign an overall rating that is about seven points higher.
Cheap Talk 
13 comments
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May 4, 2011 at 3:30 pm
Thorfinn
Rather than saying that the price of the subtle wine is higher because supply is lower; it would make more sense to say that the demand is more inelastic, or potentially because production costs are higher.
May 4, 2011 at 4:02 pm
emir
You write (emphasis added) “Suppose there are 100 different styles of wine and for every different style there is a group that likes that style and only that style. There will be a lot of variation in the price of different styles because the price will depend on the supply of that style _and the size of the group that likes that style_. Now ask a person to taste a randomly selected wine and rate it. There will be no correlation between price and ratings.”
This is not quite correct. If the variation in the price stems from the size of the group that likes each style, there will indeed be a correlation between price and ratings.
More generally, if there is variation in supply but the correlation between supply and ratings is weakly positive, then any variation in the size of the groups that like each style will generate a positive correlation between price and ratings.
(re: Thorfinn’s point above, this comment assumes a perfectly competitive market for each wine so there is no variation in elasticities)
May 4, 2011 at 9:58 pm
jeff
true.
May 4, 2011 at 4:20 pm
brian
it would seem that testing the correlation between prices and ratings within categories of wine would better solve the problem
in this context the relative popularity of wine types would be irrelevant
May 4, 2011 at 10:01 pm
jeff
still, even within categories of wine there are differences in the approaches of different winemakers. and also in the quantities they produce.
May 5, 2011 at 3:13 am
noamnisan
I suppose that the null hypothesis in this case (at least in the mind of most readers) is that people prefer expensive wine just *because* they are expensive. While your explanations are certainly possible, one can certainly not say that the null hypothesis is weakened by this reserach. It seems that more reserach involving drinking expensive wines is needed.
May 5, 2011 at 8:18 am
Sean
Gneezy and Gneezy ran a field experiment at a winery that offered tastings. The winery allowed them to vary prices on the wines and track demand. The really nice thing about this experiment is that potential buyers were able to taste the wines before purchasing them.
Customers saw prices before they tasted the wine. The design was across-subjects (each consumer only participated in one treatment condition). Given a high quality wine, a high price increased consumers’ ratings of the wine. Given a low quality wine, a high price decreased consumers’ ratings of the wine (“high” and “low” prices were the same for both wines). Demand for high (low) quality wines actually increased (decreased) with higher prices.
So at least with this one winery’s wines, consumers were able to successfully differentiate between high and low quality wines (when assigned the same price, consumers preferred the better wine), but their preferences were also a function of prices (for a given wine, ratings were positively (negatively) with prices for high (low) quality wines).
May 5, 2011 at 11:22 am
jeff
thanks for the reference. i will check it out. do you know the title of the paper or do you have a link?
May 5, 2011 at 1:27 pm
Sean
I can’t find the paper, I saw Uri present, it. The talk title was “Price-based Expextations”. It struck me as a very clever design.
May 5, 2011 at 4:04 pm
Patricia Ledesma
Perhaps it might be “Pricing Experimentation in Firms: Testing the Price Equal Quality Heuristics”? Seems to be unpublished. Here’s the abstract: http://econ.as.nyu.edu/docs/IO/11975/Gneezy_CESS.pdf
May 5, 2011 at 4:39 pm
jeff
thank you!
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