When Ray Reagans decides to purchase a bottle of wine, he makes his buying decision the same way most people would.
“I will go to the Wine Spectator and see what the critics are telling me, check to see how long they’ve been good, and I’ll buy it,” explains Reagans, associate professor of Organizational Behavior & Theory.
On the other end of the spectrum, his friend Peter Roberts, associate professor of Organization and Management at Emory University’s Goizueta Business School, is a wine aficionado, knowledgeable enough to make a decision without the critics’ help.
“Peter will look for a really good bottle of wine that only costs between $7 and $10,” Reagans says. “It’s a lovely example of the two types of people we’re talking about. I’m the typical consumer, and he’s the informed consumer. We illustrate the process from totally different ends of the continuum.”
The two friends, who taught at both the Tepper School and Columbia before their paths diverged a few years ago, decided to parlay Roberts’ knowledge of wine and their collective interest in pricing and reputation to co-author a paper, “Critical Exposure and Price-Quality Relationships for New World Wines in the U.S. Market,” which appeared in the spring issue of The Journal of Wine Economics.
Their efforts yielded unusual fruit: After winning the Liquid Assets Prize at the 2007 meeting of the American Association of Wine Economists and Vineyard Data Quantification Society, Reagans and Roberts were awarded a 1982 bottle of Bordeaux.
The paper explores the role wine critics play in the pricing of so-called New World wines, from such countries as Australia, Canada, Argentina and Chile, among others.
“You have this market that’s exploding, if you look at how much they were producing and how much they were selling worldwide,” says Reagans. “As it grows, it’s hard for people to pay attention to everything.”
To determine whether a wine is worth buying, consumers consider many factors — the reputation of the producer, for example. They also read critics’ reviews, which affect reputation. In their research, Reagans and Roberts looked at three magazines: the Wine Spectator, the Wine Advocate and the Wine Enthusiast.
The two studied the role that attention plays in the relationship between price and quality. By analyzing a sample of New World wines sold in the United States from 1987 to 2001, they determined that exposure through reviews strengthened the relationship between pricing and the public’s perception of the producer’s reputation for product quality. Moreover, producers who received poor reviews that were widely distributed fared worse than those who received little publicity.
“Notoriety is the two-edged sword,” says Roberts. “If you want to be known for your quality, you have to be known. So you see a more positive impact for the good players, but the exposure does reveal your pimples and warts.”
So producers whose quality varies might not want to be held to such close scrutiny by reviewers or consumers, Roberts explains.
The same theory may also hold true in other markets where critics influence price, such as restaurants, films, plays, or even the stock exchange. When someone attempts to put a price on what is being offered, “there are a couple of things they need to know,” says Roberts. “One is to what extent the market will like it, and the second is, will they even notice it?”
The two friends plan to celebrate by sharing their spoils, though Reagans readily admits that they won’t enjoy it equally: “He’ll know what he’s drinking.
“Peter likes wine; I like stories,” adds Reagans. “I couldn’t tell the difference between a five-dollar bottle of wine and a very expensive bottle of wine. But I know something about analysis.”