Hedonic wine price functions and measurement error

Accumulated theoretical and empirical evidence suggests that wine prices de pend on quality, reputation and objective characteristics. Unlike previous studies, we recognize that quality and reputation are latent constructs and therefore employ factor analysis and 2SLS techniques to consistently estim ate hedonic prices in the presence of attributes measured with error. The a pplication to Australian prmium wines points to significant reputation effe cts but insignificant quality effects. It is also illustrated that inapprop riately using standard OLS procedures can seriously distort the statistical significance of attributes, the implicit marginal attribute prices, and th e predictions of 'average' prices for a given set of characteristics.