Status hierarchies and quality
Daniel Malter
Harvard Business School
Research
• Identity, status hierarchies, classifications of
producers in markets
– Malter (2014) On the causality and cause of returns to
organizational status: evidence from the grands crus
classes of the Medoc. Administrative Science
Quarterly
– Malter (2016) Chateau Pontet-Canet. HBS case
•
RQ: What incentives do producers have and
what quality choices do they make when they
can move versus cannot move in their
classification
Empirical setting
• fixed classification in the Medoc
• flexible/none in St.-Emilion & Pomerol
• Matching chateaux from St.-Emilion and
Pomerol to the chateaux of the Medoc
Empirical approach
• Identify implicit right bank classification
• Estimate effects of quality, reputation, and
class on price on both sides
• Observe producer’s quality choices
• Assess the effect of quality improvements on
(relative) marginal costs
• Explain producer’s quality choice
Matched sample
• Goal: match on class
• Take the 61 grand cru classes of the Medoc
– 5 grand cru classes
– fixed hierarchy from 1855
• Identified 69 potential matches in St.-Emilion and Pomerol
(Kuehler & Kuehler 2001)
• Identify close rank neighbors in quality and price
conditional on quality, 1990-1999
Example
Quality rank: 1
Conditional price rank: 2
Quality rank: 1
Conditional price rank: 2
Effects of quality, reputation,
class on price
Analyses
• DV: logged price (GDP-deflated), 2000-2010
• Quality: rating of wine i for vintage t
• Reputation: 10-year moving average of quality
of wine i for vintages t-1 to t-10
• Class: (matched) class fixed effects
• Estimates from a semi-parametric regression
including vintage fixed effects
Effect of quality on log price
Effect of reputation on log price
Effect of class on log price
Intercept
2nd class
3rd class
4th class
5th class
f(quality)
g(reputation)
Observations
Adjusted R-squared
Haut-Medoc
5.35***
–1.00***
–1.13***
–1.21***
–1.22***
***
***
558
0.886
Saint-Emilion & Pomerol
6.13***
–1.28***
–1.53***
–1.81***
–1.77***
***
***
488
0.858
Effects on price
Summary:
• Greater absolute $ effect of increasing quality
on price on the right bank, where the
classification is flexible, because the producers
are smaller
Competition/quality
Average quality by class
1990-1999
Haut-Médoc
St.-Emilion & Pomerol
1st
91.6
91.4
2nd
87.7
88.1
3rd
87.1
87.3
4th
86.1
87.8
5th
85.6
86.1
1st
95.2
94.6
2nd
92.0
91.8
3rd
90.4
91.0
4th
89.5
89.8
5th
88.8
89.1
2000-2010
Haut-Médoc
St.-Emilion & Pomerol
Competition/Mobility
Summary
• Competition for quality is indistinguishable
between the two riverbanks
MR = MC
• No estimate for MC, but an intuition about their
relative development
• Marginal costs
– More labor-intensive processes in the 2000s
– Selection (produce less volume per areal unit):
• a. if right bank producers had to be more selective to increase
quality, then they should produce less volume per areal unit. I
don’t find that.
• b. increases wine quality -> reduces costs of marketing. because
marketing is partially fixed costs, it reduces the costs
proportionally more on the right bank
• Summary: differences in MC are unlikely to explain the
equal quality trajectory
MR >= MC with threshold
• i=iQi-iQi2
• Qi*=i/2i
• Assume quality threshold Qmax beyond which
the market does not recognize or reward
differences in quality (wink: 100 Parker points)
• Producers will choose Qmax if Qi*>= Qmax
Conclusions
• Rating systems create quality ceilings
• A quality ceiling can induce
– greater homogeneity in quality among producers
– lower peak quality
Thank you