The Value of a Grape: An Analysis of Pricing in Napa Valley Based on Marginal Quality Differentiation

Abstract

The quality and price of wine witnesses a positive correlation across all regions and viticulture’s, however, there is an established bias and inflation in the price of wines produced in Napa Valley. This paper sets out to investigate the causes behind Napa Valley witnessing an uncorrelated price increase despite witnessing marginal increases in quality. I will be looking specifically at the sub-regions in Napa Valley and Sonoma County of Mt. Veeder and Sonoma Valley. These regions are separated by minimal territory and both exhibit the same viticulture yet, the average price of wine from Mt. Veeder is nearly doubled that of wine produced in Sonoma Valley. At the same time, quality ratings are only marginally higher in wine produced in Mt. Veeder, specifically .5 points higher. This paper intends to explore the reasons behind such a drastic price inflation without looking at a reputation factor since Napa Valley is often times considered as the pinnacle of American wine production. However, if prices were solely determined by quality ratings, we should see higher prices coming out of the Sonoma Valley region. The exploration is done so through several regressions and a hedonic analysis which are installed to answer the question of why Napa Valley is overpriced?