Category Archives: Agricultural Economics

Hedonic pricing of yogurt, cheese and wine in the Canadian retail market

Have you ever thought about reasons that motivate you to buy a certain, specific type of yogurt, cheese or wine? Do you know what are the main attributes that you take under consideration while making purchasing decisions? Are you aware of how much value in monetary terms you put on each of the commodity attributes? Well, if you haven’t thought about it, most likely you are not very interested in the hedonic pricing method. On the contrary, I am very interested in this methodology and I have chosen it as a research subject of my doctoral dissertation.

 

Researches that concern hedonic pricing method of commodities have been in place since late twenties of the 20th century and they have been exercised on the variety of commodities starting from agricultural ones and ending on durables like automobiles, computers and housing. Currently in agricultural economics the most frequent use of hedonic pricing method is employed in wine economics. The most important contributors to the advancement of hedonic pricing methodology include following scientists:

  1. Frederic, V. Waugh (1927), who pursued first published hedonic pricing analysis of agricultural commodity (asparagus);
  2. Zvi Grliliches (1961), who used and advanced hedonic pricing methodology on durable goods (automobiles);
  3. Sherwin Rosen (1974), who outlined currently the most commonly used theoretical basis for the hedonic pricing method;
  4. Marc Nerlove (1995), who used hedonic pricing methodology for wine, showed its crucial shortcomings and suggested methodological improvements.

The research on yogurt, cheese and wine that is proposed under the auspicious of my doctoral dissertations will to large extent use the methodological approach in hedonic pricing method as proposed by Marc Nerlove in his work on wine from 1995. The reason for the preference of Nerlove’s approach lays in the fact that his research was pursued on Swedish wine, which at that time was supplied under government monopoly. Similar situation is currently present in Canada where all three commodities: yogurt, cheese and wine belong to the group of commodities with controlled supply. Therefore Nerlove’s methodology seems to be appropriate for hedonic pricing studies in the Canadian market.

The main objective of my PhD research idea concerns the willingness to study and model Canadian consumers’ valuation of commodities’ attributes while making purchasing decisions and faced with differentiated products like yogurt, cheese and wine.

Specifically this research plans to:

1. Identify commodity specific attributes that Canadian consumers take under consideration while making purchasing decisions e.g.:

  • organic versus conventional in case of yogurt, cheese or wine,
  • fat content, consistency, type, brand, container size in case of yogurt and cheese,
  • color, origin, sweetness, alcohol content, grape type, vintage year in case of wine etc.

2.  Construct commodity specific models (one for each commodity of interest) and assign consumers’ valuation (in monetary terms) for each identified, important commodity specific attribute. For example: this research will calculate and assign monetary values that Canadian consumers put on the fact that yogurt has a label “organic” versus “conventional” or on the fact that wine comes from “Bordeaux” versus “Mendoza” versus “Okanagan Valley” etc.
3. Use retail prices time series data on yogurt, cheese and wine to pursue a proper econometrics analysis and tests to ensure valid functional forms for models and as a consequence, unbiased estimates.
4. Form industry and policy relevant suggestions associated with obtained results. Communicate and suggest relevant, industry and policy specific development solution.
5. Advance theoretically modeling and econometrics data analysis associated with hedonic pricing methodology. Construct relevant improvements for hedonic pricing theory.

The results of this research will likely be of interest to several groups of the society:

1.  Commodity specific industries: producers (small and large scale), traders, processors and retailers:

  • Producers will be better informed about attributes valued by the purchasers of selected commodities. This will result in their ability to produce commodity specific traits that are highly valued by the purchasers in the Canadian market. This in turn will likely improve producers’ investment decisions. For example: Grape producers will be able to plant grapes’ types that consumers value the most and will diminish losses resulting from the cultivation of lower valued varieties. In addition producers will be able to correctly identify price positioning for their commodities. They will improve the control of market situation for their goods and will be able to see which types of their goods are overpriced versus underpriced, which ones need to exit or be introduced to the market.
  • Traders, retailers,  processors will diminish their costs associated with purchasing commodities with attributes that purchasers don’t value the most. Likely their sorting and repackaging costs will be lowered because they will receive commodities that possess right attributes.

2. Government of Canada

The government will be able to improve its industry specific policies and will be better prepared to encourage producers to produce commodities that have traits that are valued in the market. The agricultural Research and Development (R&D) activities will likely be targeted better. The results of this research will be important for the establishment of the long- term industry specific development strategies.

 3. Consumers

The purchasers of these commodities will be able to verify how much value in monetary terms they put on certain commodity attributes. For example: they will be able to see how in monetary terms they respond to certain labels e.g.: “organic”or  association with specific for the industry organizations like appellation (wine) etc. Such information will positively impact consumers’ conscious purchasing decisions. Consumers thanks to the estimations done via hedonic pricing method will be able to differentiate bargains from expensive purchases (good value for money versus rip-off).

 4. Science, specifically agricultural economics, marketing and agribusiness related branches

Research gap will be filled. Up to date there are no studies on  the hedonic pricing of  yogurt or cheese in the canadian retail market. While there are many studies on the hedonic pricing of wine sold in Canada, in many cases these researches  present inconsistent approach to the hedonic pricing methodology in terms of estimation procedures, significance of variables chosen for the modeling purpose, completeness and replicability of the results to the Canadian wine industry as a whole.