Modelling choicewhenpriceisacueforqualityacasestudy with Chinesewineconsumers

Abstract

Experience productsarethosethequalityofwhichcannotbeascertained untilafter consumption,forcingconsumerstobasetheir purchase decisiononanexpectationofthe product’s quality.This expected quality is basedoncuesavailablebeforepurchase, among which price is noteworthy,asconsumerstendtobelievethathigherpricesimplyhigherquality.But price also stressestheconsumers’budgetrestriction, inducingadouble-andconflicting-globaleffectonpurchaseprobability.UsingthetraditionalformulationofRandomUtilityModelsforexperiencegoods(i.e.introducingallattributesdirectlyintheutilityfunction)canleadtoanendogeneityproblemduetotheomissionof expectedquality, introducingbiasontheresults.UsingastatedwinechoiceexperimentconductedinChinaasacasestudy,wecorrectfor endogeneitybymodellingeachalternative’s expectedquality as alatentvariable,ex-plainedbyallavailablequalitycues,including price. Thenweexplainchoiceasatrade-offbetween price and expectedquality. Thisallowsustoseparatebotheffectsof price andcorrect foratleastonesourceofendogeneitywhilebeingconsistentwithbehaviouraltheory;thishaseitherbeenignoredornottreatedcorrectlyinpreviousliterature.Moreover,asthemodelrequiresonlyasinglequalityindicatorforeachalternativetoachieveidentification,therespondents’ burden increasesmarginally.Our resultsshowthattheuseoflatentvariablesreducesendogeneityandeffectivelyallowstomeasurebotheffectsof price separately,obtaininghighersignificanceandcor-rect signsforitsparameters.