Journal of Applied Statistics

ISSN: 0266-4763 (Print) 1360-0532 (Online) Journal homepage: http://www.tandfonline.com/loi/cjas20

Estimating class-specific parametric models using

finite mixtures: an application to a hedonic model
of wine prices

Steven B. Caudill & Franklin G. Mixon Jr.

To cite this article: Steven B. Caudill & Franklin G. Mixon Jr. (2016) Estimating class-specific
parametric models using finite mixtures: an application to a hedonic model of wine prices,
Journal of Applied Statistics, 43:7, 1253-1261, DOI: 10.1080/02664763.2015.1094036

To link to this article: http://dx.doi.org/10.1080/02664763.2015.1094036

Published online: 12 Oct 2015.

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 Journal of Applied Statistics, 2016
Vol. 43, No. 7, 1253–1261, http://dx.doi.org/10.1080/02664763.2015.1094036

Estimating class-specific parametric models

using finite mixtures: an application to a
hedonic model of wine prices
Downloaded by [Orta Dogu Teknik Universitesi] at 03:12 08 April 2016

Steven B. Caudilla,b and Franklin G. Mixon Jr.c∗

a Department
of Economics, Florida Atlantic University, Boca Raton, FL, USA; b Department of
Economics and Statistics, University of Milan – Bicocca, Milan, Italy; c Center for Economic Education,
Columbus State University, Columbus, OH, USA

(Received 13 November 2014; accepted 10 September 2015)

Hedonic price models are commonly used in the study of markets for various goods, most notably those
for wine, art, and jewelry. These models were developed to estimate implicit prices of product attributes
within a given product class, where in the case of some goods, such as wine, substantial product differen-
tiation exists. To address this issue, recent research on wine prices employs local polynomial regression
clustering (LPRC) for estimating regression models under class uncertainty. This study demonstrates that
a superior empirical approach – estimation of a mixture model – is applicable to a hedonic model of
wine prices, provided only that the dependent variable in the model is rescaled. The present study also
catalogues several of the advantages over LPRC modeling of estimating mixture models.

Keywords: local polynomial regression clustering; finite mixture models; latent class models; hedonic
price models; wine markets

JEL Classification: C51; L11; L66

1. Introduction and background

The hedonic price model [21], which explains the price (value) of a good or service on the basis
of its corresponding attributes, is a fundamental empirical tool in many areas of the economics
literature, particularly so in the area of residential real estate pricing, where house prices are
typically modeled as a function of various property characteristics.1 Hedonic price models are
also commonly used in the study of markets for other goods, most notably those for wine, art,
and jewelry.2 In a recent study of wine prices, Costanigro et al. [8] point out that economists have
long been interested in markets for differentiated products, adding also that when differentiated
products are located far apart in product space, they no longer compete against each other [11].
In addressing the product space or separate markets issue in the case of wine, Costanigro et al.

*Corresponding author. Email: mixon_franklin@columbusstate.edu


c 2015 Taylor & Francis
 1254 S.B. Caudill and F.G. Mixon

[8] employ a unique approach – local polynomial regression clustering (LPRC) (see [3]) – to
estimating hedonic price (regression) models under class uncertainty.
This study demonstrates that a superior approach – a mixture model – is applicable to a hedonic
model of wine prices, such as that in [8], provided that the dependent variable in the model is
rescaled. In doing so, this study details some advantages that the mixture approach may have
over LPRC and, as much as possible, it provides comparisons between the estimation results
from the two statistical methods using the California and Washington wine data examined in
[8]. Our empirical results show that the two mixture models estimated have better aggregate
out-of-sample performance than the LPRC models estimated in prior research. Before turning to
our empirical approach to hedonic pricing of a differentiated good (i.e. wine), we briefly review,
in the section that follows, both the foundational and more recent literature on hedonic price
models, with particular attention to those applied to wine.
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2. Hedonic pricing of wine: a brief review of the literature

In an early study in this genre, Oczkowski [18] develops a hedonic price function for Australian
table wine. That function suggests that quality, cellaring potential, grape variety/style, grape
region, grape vintage, and producer size are important characteristics for explaining price devi-
ations from mean Australian table wine prices.3 Similarly, Combris et al. [5] apply a hedonic
price approach to Bordeaux wine. In addition to the objective characteristics of wine, which are
included on the bottles’ labels, they examine the sensory characteristics of each wine. Although
Combris et al. [5] conclude that market prices for Bordeaux wine are generally determined
by the objective characteristics described on the bottles, estimation of a jury-grade equation
indicates that quality is essentially determined by sensory characteristics.4 Next, Nerlove [17]
demonstrates that hedonic models can also be used in situations where competition in prices is
nonexistent, in which case the price of the good is, like the good’s characteristics, exogenous
to the consumer. Nerlove [17] develops such a hedonic model for wine using Swedish data that
express quantity sold as a function of price and quality attributes, given that, as he argues, the
Swedish wine market is not competitive.
More recently, development of hedonic price specifications for wine and related markets has
increased in volume. Mirroring earlier studies, Caracciolo et al. [2] note that wine is a highly
differentiated product that is sold at widely varying prices. As such, they build upon the goods-
classification literature in economics [9,14–16] by estimating a hedonic price equation for a
specific Italian grape variety (Aglianico) that includes key credence attributes of wine, such as
certifications and quality ratings made by expert tasters. The results suggest that the implicit price
of Destination of Origin (Guaranteed) certification provides a significant reputational advantage,
enabling suppliers to extract a premium from wine consumers [2]. Relatedly, Corsi and Strom [7]
indicate that organic wines are increasingly produced and appreciated, and, given that organic
wines are more costly to produce, a crucial question is whether they generate a price premium. To
answer this question, these authors estimate hedonic price models for Piedmont organic and con-
ventional wines, and find that, along with characteristics of interest to consumers, some farm and
producer characteristics not directly relevant to consumers do significantly impact wine prices.
They also find that organic wine tends to garner higher prices than conventional wine, and that
the organic attribute is not simply an addition to other price components, it also modifies the
impact of the other variables on price [7].
Levaggi and Brentari [13] explore the price determinants for Italian red wine sold on the
domestic market over the 2005–2009 period. The hedonic attributes examined in this study
include retail channel (e.g. supermarkets and wine stores), label characteristics, chemical anal-
ysis, and sensory and experts’ evaluations. They find that in both large-scale retail trade
(i.e. supermarkets) and wine stores consumers value only those label characteristics that are
 Journal of Applied Statistics 1255

verifiable, thus supporting the goods-classification research by Nelson [15,16], Darby and Karni
[9], and Mixon [14], and that offering wine through both retail channels is an effective strategy
for suppliers [13]. Next, Oczkowski and Doucouliagos [20] examine the relationship between
the price of wine and its quality through a literature review of more than 180 hedonic wine
price models developed over 20 years. Their review suggests that the relationship between the
price of wine and its sensory quality rating is a modest partial correlation of + 0.30, which
exists despite the lack of information held by consumers about a wine’s quality and the incon-
sistency of expert tasters in evaluating wines. The review of the literature in this study supports
the existence of strategic buying opportunities for better-informed consumers as well as strategic
price setting possibilities for wine producers given the incomplete quality information held by
consumers [20].
A recent study of house prices by Belasco et al. [1] demonstrates how academic researchers
are employing more sophisticated statistical procedures in order to better understand how hedo-
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nic pricing works. Through the use of a finite mixture model, these authors are able identify
latent submarkets in housing that are based on the demographic characteristics of residents. The
approach taken in this study is important, given that participants in each submarket value hous-
ing characteristics differently [1]. The academic literature on the hedonic pricing of wine is also
making use of more advanced statistical procedures in order to explore separate classifications of
wine. A particularly interesting study along these lines is that of Costanigro et al. [8], who point
out that economists have long been interested in markets for differentiated products, adding also
that when differentiated products are located far apart in product space, they no longer compete
against each other [11]. The hedonic approach as developed by Rosen [21] is meant to estimate
implicit prices of product attributes within a given product class.5 However, as the product space
between two given goods increases, the market valuation of the attributes included in them will
diverge [8].
In addressing the product space or separate markets issue in the case of wine, Costanigro
et al. [8] employ a unique approach – LPRC (see [3]) – to estimating hedonic price (regression)
models under class uncertainty. LPRC consists of several steps, beginning with the estimation of
the functional relationship between dependent and independent variables in the regression model
locally (via local polynomial regression), and followed by aggregating the sample observations
into clusters sharing functionally similar local nonparametric estimates. Finally, once the clusters
have been identified, class-specific parametric estimates are obtained by ordinary least squares
(OLS) using data for each cluster.
Costanigro et al. [8] apply their method to estimate hedonic price regressions for a sample
of 9600 wines in California and Washington. Following a study conducted by Ernst & Young
Consulting [10] for Australian wine producers, Costanigro et al. [8] assume the existence of four
wine classes. For the first stage, Costanigro et al. [8] use the local regression smoothing (LOESS)
algorithm [4] and only the continuous independent variables in their data set to obtain estimated
partial derivatives at each point in the data set, after which the Ward algorithm is used to partition
the sample into four clusters based on the similarity of these derivatives. OLS is applied to each
of the four clusters, including several dummy variables omitted from the first stage local poly-
nomial regression, thus producing class-specific hedonic regression models. Costanigro et al. [8]
demonstrate the usefulness of their approach using their estimation results to make out-of-sample
forecasts for a similar sample of wines.6
This study demonstrates that a superior approach – a mixture model – is applicable to a hedo-
nic model of wine prices, such as that in [8] and the earlier studies discussed above, provided that
the dependent variable in the model is rescaled. In doing so, this study details some advantages
that the mixture approach may have over LPRC and, as much as possible, it provides compar-
isons between the estimation results from the two statistical methods using the California and
Washington wines data examined in [8]. In the following section, we discuss the estimation of a
 1256 S.B. Caudill and F.G. Mixon

mixture model with concomitant variables, which are included in the probability function to help
explain regime or class membership. Such a discussion indicates that mixture models have some
advantages over the LPRC approach.

3. Advantages of the mixture approach

In a finite mixture model, the coefficients of the concomitant variables and regression parameters
are simultaneously estimated using maximum likelihood, thus ensuring that the resulting stan-
dard errors are correct. The LPRC procedure, on the other hand, fails to incorporate the sampling
variation and cluster uncertainty in the first stage cluster assignment on the standard errors in the
OLS stage, thus leading to underestimation of these standard errors. Next, although Costanigro
et al. [8] express concern about the use of concomitant variables, lest the switching function be
mis-specified, this is not a great concern for several reasons. First, the role of the concomitant
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variables is to improve cluster assignment. Second, hypothesis testing on the coefficients of the
concomitant variables is possible. Finally, if desired, the mixture model can be estimated without
including any concomitant variables if their inclusion is worrisome.
There are a number of additional benefits of the mixture approach. The inclusion of dummy
variables as concomitant variables to assist in class assignment is straightforward, whereas the
inclusion of dummy variables in the LOESS approach [4] used by Costanigro et al. [8] in the
first stage is problematic. The mixture model also facilitates the use of information criteria for
the selection of the number of regimes or classes. This cannot be accomplished in the LPRC
approach in its present form, although Costanigro et al. [8] recognize this limitation and mention
it as the subject of future research. We now turn to the estimation of a mixture model employing
the Costanigro et al. [8] wine data, with comparisons to follow.

4. The dependent variable and estimation results

Citing Landon and Smith [12], Costanigro et al. [8] transform the dependent variable price,
measured as the retail price of wine as suggested by a given winery, to tprice, where tprice is
given by,

tprice = 1/ price. (1)
Unfortunately, this transformation appears to be the cause of their difficulty with the esti-
mation of a mixture model. A simple rescaling of tprice (i.e. multiplying by 100) solves the
problem, aided by the use of the SAS Institute experimental procedure (proc) fmm.7 Next, using
the rescaled dependent variable, several mixture regression models are estimated using the Cal-
ifornia and Washington wines data. These models include the rescaled dependent variable and
the same set of independent variables as in [8]. These include binary variables for wine regions
in California and Washington, designated as Napa, Bay Area, Sonoma, Southcoast, Carneros,
Sierra Foothills, Mendocino, and Washington. Also included are binary variables for grape vari-
ety, designated as Non-Varietal, Pinot Noir, Cabernet, Merlot, and Syrah, as well as binary
variables for reserve, vineyard, estate, and vintage.
We estimate two different mixture models based on the inclusion of different sets of con-
comitant variables in the switching function. The first model does not include any concomitant
variables. The second uses only the continuous independent variables, Cases, Score, and Age,
as concomitant variables. These variables capture the number of cases (in thousands) of wine
produced, wine rating scores from Wine Spectator magazine, and the years of aging before com-
mercialization, respectively. Costanigro et al. [8] suggest that this model has the most in common
with their approach, given that only continuous independent variables were used in their first
stage.
 Journal of Applied Statistics 1257

Table 1. Costanigro et al. [8] results.

Variable Regime 1 Regime 2 Regime 3 Regime 4

Cases 0.052 (17.13) − 0.010 (1.15) − 0.024 (3.62) − 0.019 (1.37)

Score − 0.293 (23.21) − 0.131 (15.56) − 0.154 (16.61) − 0.152 (9.46)
Age − 1.071 (16.14) − 0.444 (11.01) − 0.511 (13.23) − 0.202 (2.91)
Price $17.23 $32.17 $54.23 $92.95
Sample fraction 0.495 0.348 0.106 0.051

Notes: The dependent variable is rescaled. Table reports only the coefficients of the continuous independent variables.
Lastly, the figures in parentheses are absolute values of t-ratios.

For reference, the Costanigro et al. [8] estimation results for only the continuous independent
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variables Cases, Score, and Age and using our rescaled dependent variable are given in Table 1.
These coefficients correspond to the results in Table 5 in [8]; however, they are multiplied by 100.
Table 1 also provides information on the average wine price and fraction of sample observations
for each of the four Costanigro et al. [8] regimes. The coefficients for regimes 3 and 4 seem to be
similar, while the coefficients for regimes 1 and 2 are less so. Regime 1 represents about one-half
of the sample and has the lowest average wine price, which is about $17. Regime 4 accounts
for the fewest observations, about 5%, and the highest wine price, which is about $93. Taken
together, their first two regimes account for about 85% of the sample.
In order to demonstrate the usefulness of their approach, Costanigro et al. [8] forecast wine
prices for an additional sample of 3233 wines.8 They repeat their first steps to obtain four new
clusters from the sample, and then use the original in-sample-based OLS regressions to make
predictions. They measure forecasting precision using the median percentage error rate (MPER),
given by,
 
abs(y − ŷ)
MPER = median . (2)
y
The LPRC method yields an overall MPER of 12.24%.9 This particular MPER is important
because it provides the easiest avenue for comparing results from the two methods. Aggregate
comparisons are the only comparisons that can be easily made between the two methods because
the resulting sample partitions, or clusters, from each method differ.

4.1 Mixture with no concomitant variables

This mixture model separates the sample into classes without using any correlates to assist in
separating the sample. The estimation results are given in Table 2. The Akaike information cri-
terion and the Akaike information criterion corrected indicate the presence of four wine classes,
although the Bayesian information criterion (BIC), which assigns a higher penalty for additional
parameters, indicates instead that two wine classes describe the data. The BIC result is not sur-
prising given that the Costanigro et al. [8] tests indicate that 85% of the sample is described by
two wine classes.
In order to make comparisons to Costanigro et al. [8], we put the BIC result aside and confine
the remainder of this discussion to a model with four wine categories. Like LPRC, the mixture
model generally provides evidence for four wine classes. The classes represent the following
proportions of the sample: 0.247, 0.075, 0.412, and 0.265. The (posterior probability weighted)
average wine price in each category is, respectively, $25.55, $36.78, $29.17, and $33.92. These
differ considerably from the results of Costanigro et al. [8], due to the fact that wine prices in a
mixture model are weighted by the probability of regime membership, which tends to average
 1258 S.B. Caudill and F.G. Mixon

Table 2. Mixture model: four regimes and no concomitant variables.

Variable Regime 1 Regime 2 Regime 3 Regime 4

Intercept 110.66 (29.10) 72.127 (10.77) 71.379 (28.12) 41.376 (19.84)

Cases 0.092 (7.33) 0.049 (4.29) 0.062 (15.07) 0.444 (17.76)
Score − 0.937 (21.55) − 0.463 (6.45) − 0.507 (17.83) − 0.255 (11.46)
Age − 1.313 (8.22) − 0.181 (0.85) − 1.099 (9.50) − 0.624 (3.80)
Napa − 5.654 (12.90) − 11.829 (11.80) − 5.882 (22.04) − 1.137 (3.29)
Bay Area − 4.586 (8.01) − 3.647 (2.98) − 3.936 (9.29) − 1.389 (3.07)
Sonoma − 5.076 (11.14) − 10.591 (8.34) − 3.885 (13.80) 0.240 (0.70)
Southcoast − 4.896 (9.32) − 7.439 (5.90) − 3.250 (9.91) 0.728 (1.89)
Carneros − 5.401 (9.07) − 9.648 (6.66) − 3.878 (9.91) 0.125 (0.29)
Sierra Foot − 2.914 (4.00) − 4.728 (2.26) − 2.998 (6.14) − 0.030 (0.06)
Mendocino − 2.259 (3.54) − 10.367 (8.07) − 2.677 (2.03) 1.928 (0.96)
Washington − 0.709 (1.40) − 3.455 (2.92) − 2.734 (7.70) 1.014 (2.37)
− 2.805 (5.70) − 0.768 − 3.888 − 5.775
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Non-varietal (0.61) (11.06) (13.60)

Pinot Noir − 2.310 (6.41) − 7.733 (8.62) − 3.651 (13.12) − 2.828 (9.06)
Cabernet − 1.662 (4.76) − 7.134 (7.51) − 1.850 (8.42) − 4.138 (13.03)
Merlot − 3.343 (7.94) − 1.670 (1.36) − 2.054 (8.78) − 1.867 (6.94)
Syrah − 0.181 (0.27) − 2.069 (1.70) − 1.915 (2.09) − 0.181 (0.12)
Reserve − 0.815 (2.77) 1.448 (2.12) − 1.899 (7.45) − 1.355 (4.53)
Vineyard − 1.871 (6.16) − 0.359 (0.76) − 1.613 (6.93) − 0.185 (0.70)
Estate − 1.742 (1.67) − 0.558 (0.59) 0.416 (0.67) − 1.085 (2.26)
Y91 4.812 (8.36) 0.482 (0.47) 4.310 (11.94) 5.604 (12.35)
Y92 6.212 (11.80) 0.959 (0.88) 4.000 (10.91) 5.240 (9.72)
Y93 4.455 (8.83) 0.008 (0.01) 3.656 (10.96) 4.730 (11.16)
Y94 3.427 (6.65) 1.169 (1.60) 2.674 (6.87) 4.341 (8.34)
Y95 2.319 (4.62) 0.504 (0.46) 2.212 (7.00) 2.734 (7.00)
Y96 1.299 (2.64) 0.179 (0.18) 1.201 (3.96) 2.840 (7.72)
Y97 1.131 (2.43) − 0.076 (0.07) 0.738 (2.34) 1.744 (4.15)
Y98 0.650 (1.33) − 0.894 (0.88) 0.013 (0.04) 0.642 (1.81)
Y99 0.634 (1.30) 1.036 (1.08) − 0.123 (0.40) 0.866 (2.34)
Concomitant regression
Intercept − 0.067 (0.50) − 1.270 (6.50) 0.442 (3.76) –
Probability 0.248 0.075 0.412 0.265
Wine price $25.55 $36.78 $29.17 $33.92

Note: The figures in parentheses are absolute values of t-ratios.

the values, thus preventing them from becoming too large or too small. When the mixture model
is used for out-of-sample forecasts, the resulting aggregate MPER is 10.17%, which is about
17% less than the value of 12.24% using LPRC.
Comparing predictions by cluster is complicated by the fact that the clusters identified are
not the same with LPRC and the mixture model, and, unlike LPRC, the mixture assignment to
clusters is probabilistic. In an effort to shed some light on the identification of clusters for the
two methods, we used in-sample predictions for both methods; then, using the clusters defined
by the in-sample LPRC, we calculated simple correlations between the LPRC prediction for that
cluster and the predictions from each of the four regimes of the mixture model. The results of
this exercise are provided in Table 3. What is immediately striking about the results is how high

Table 3. In-class correlations between LPRC and mixture models.

LPRC model Regime1 Regime2 Regime3 Regime4

LPRC1 0.941 0.728 0.934 0.542

LPRC2 0.768 0.524 0.884 0.751
LPRC3 0.663 0.374 0.593 0.304
LPRC4 0.658 0.302 0.546 0.288
 Journal of Applied Statistics 1259

the correlations are throughout, even though we are fitting the mixture predictions to the LPRC
partition. For example, all regimes have correlations in excess of 0.72 with the predictions from
the first LPRC class. Regime 3 has a correlation in excess of 0.88 with the second LPRC class.
The highest correlation with the third LPRC class is 0.663 with the predictions from regime 1.
Finally, the highest correlation, which is 0.658, with the fourth LPRC class is, again, with regime
1. Clearly, there is considerable overlap in the predictions.

4.2 Cases, score, and age as concomitant variables

The estimation results from the inclusion of Cases, Score, and Age as concomitant variables
are given in Table 4. The information criteria point, again, to four regimes. The regime weights
are, respectively, 0.163, 0.312, 0.281, and 0.245, with associated wine prices $15.07, $39.51,
$33.26, and $24.52. Once again, due to the probabilistic nature of regime membership in the
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mixture model, the disparities in cluster size and wine prices are not as great as with the LPRC
model. The effect of additional information on the switching function does increase the contrast

Table 4. Four regimes with continuous concomitant variables.

Variable Regime 1 Regime 2 Regime 3 Regime 4

Intercept 54.122 (11.68) 51.540 (16.34) 99.288 (27.48) 31.641 (12.70)

Cases 0.030 (5.17) 0.748 (6.08) 0.071 (7.22) 1.195 (6.47)
Score − 0.259 (4.70) − 0.360 (10.17) − 0.833 (21.71) − 0.113 (4.07)
Age − 1.311 (5.63) − 0.398 (2.94) − 1.153 (9.44) − 0.754 (4.81)
Napa − 6.212 (15.29) − 1.203 (2.30) − 3.791 (5.59) − 3.328 (10.51)
Bay Area − 2.949 (5.64) − 0.279 (0.52) − 1.884 (2.73) − 2.224 (5.57)
Sonoma − 5.603 (16.39) 0.098 (0.20) − 2.545 (3.94) − 2.053 (6.77)
Southcoast − 5.329 (10.73) 1.191 (2.33) − 1.141 (1.53) − 1.283 (3.98)
Carneros − 6.325 (11.07) 0.398 (0.71) − 2.546 (3.26) − 2.722 (6.81)
Sierra Foot hills − 3.516 (4.82) − 0.572 (1.01) 0.361 (0.38) 0.467 (1.22)
Mendocino − 2.540 (4.04) 1.002 (1.72) 0.164 (0.21) − 0.445 (1.11)
Washington − 0.854 (1.58) 1.462 (3.01) 0.821 (1.47) − 0.510 (1.36)
Non-varietal − 0.310 (0.44) − 5.134 (15.12) − 5.142 (13.01) − 0.893 (2.06)
Pinot Noir − 1.249 (3.12) − 4.531 (19.87) − 3.746 (9.11) − 1.994 (8.32)
Cabernet − 0.386 (0.99) − 4.608 (19.40) − 3.534 (11.37) − 0.436 (1.44)
Merlot − 1.889 (5.50) − 2.589 (10.90) − 3.319 (10.98) − 1.555 (6.58)
Syrah 0.152 (0.24) − 1.800 (6.10) − 0.514 (1.10) − 0.364 (0.98)
Reserve 0.436 (0.98) − 0.832 (4.35) − 1.007 (4.45) − 1.649 (6.82)
Vineyard − 2.422 (5.08) − 0.565 (4.03) − 0.651 (2.62) − 1.044 (6.17)
Estate − 2.417 (2.27) − 0.833 (2.08) − 0.461 (1.28) 0.096 (0.19)
Y91 4.307 (7.99) 3.721 (9.55) 4.143 (8.57) 5.660 (15.92)
Y92 4.385 (7.95) 3.312 (9.56) 4.830 (10.59) 5.684 (15.19)
Y93 3.956 (7.60) 2.776 (8.51) 3.527 (7.79) 5.129 (14.16)
Y94 2.332 (4.71) 2.732 (8.97) 3.650 (8.80) 4.070 (11.39)
Y95 0.781 (1.50) 1.910 (6.37) 2.365 (5.65) 3.402 (9.74)
Y96 0.628 (1.32) 1.219 (4.27) 1.921 (4.49) 2.646 (8.22)
Y97 0.428 (0.92) 0.441 (1.56) 1.398 (3.44) 2.291 (6.62)
Y98 − 0.070 (0.14) − 0.289 (0.99) 0.115 (0.28) 1.318 (3.81)
Y99 − 0.114 (0.23) − 0.087 (0.31) 1.465 (3.60) 0.278 (0.84)
Concomitant regression
Intercept 4.921 (1.39) − 42.649 (10.77) − 51.294 (7.80) –
Cases 1.108 (9.74) 0.010 (0.04) 1.083 (9.45) –
Score − 0.102 (2.56) 0.471 (10.48) 0.507 (6.86) –
Age 0.188 (0.75) 0.844 (4.66) 2.011 (8.59) –
Probability 0.163 0.312 0.281 0.245
Wine price $15.07 $39.51 $33.26 $24.52

Note: The figures in parentheses are absolute values of t-ratios.

 1260 S.B. Caudill and F.G. Mixon

in cluster size and wine price as compared to the first model estimated.10 The aggregate MPER
is, at 9.04%, once again below the LPRC value – in this case by about 26%.

5. Conclusion
Hedonic price models are commonly used in the study of markets for various goods, most notably
those for wine, art, and jewelry. These models were developed to estimate implicit prices of
product attributes within a given product class, where in the case of some goods, such as wine,
substantial product differentiation exists. To address this issue, recent research on wine prices
employs LPRC for estimating regression models under class uncertainty.
This study shows how a simple rescaling of the dependent variable makes possible the esti-
mation of a mixture model for hedonic wine regressions. Our empirical results show that the
two mixture models estimated have better aggregate out-of-sample performance than the LPRC
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models estimated in prior research. This study also catalogues several of the advantages over
LPRC modeling of estimating mixture models.

Acknowledgements
The authors wish to thank, without implicating, an anonymous referee of this journal for providing helpful suggestions
on a previous version. Much of this research project was done while the first author was a visiting professor of economics
at the University of Milan – Bicocca.

Disclosure statement
No potential conflict of interest was reported by the authors.

Notes
1. A recent study by Sirmans et al. [24] provides a catalogue and extensive discussion of the most prevalent physical
property characteristics included in this line of inquiry. These characteristics are included in a new study by Salter
et al. [22], which controls for about 10 housing characteristics in examining the relationship between real estate
agent attractiveness and transactions prices.
2. Oczkowski [19] provides a concise comparison of popular and regression-based approaches to wine pricing.
3. See Schamel and Anderson [23] for a related hedonic price study of wines from both Australia and New Zealand.
4. See Combris et al. [6] for a related study of Burgandy wine, and Landon and Smith [12] for a study of the impact of
quality and reputation on the market for Bordeaux wine.
5. As Costanigro et al. [8] indicate, it is assumed that the goods in question are somewhat differentiated but similar
enough that consumers consider them as variations of the same product.
6. Costanigro et al. [8] admit, throughout their study, that the latent class, or finite mixture model is the closest com-
petitor to LPRC. They also realize that the superior performance of LPRC in comparison to finite mixture models
would validate LPRC. However, the authors had little success estimating a finite mixture model.
7. This fmm procedure was not available to Costanigro et al. [8] at the time their study was produced. Exploratory tests
using the fmm procedure with the unscaled dependent variable proved troublesome in producing the current study.
8. In their study, Costanigro et al. [8] state that the size of the auxiliary sample is 3265, but we are able to reproduce
their pooled sample result of 19.71% given in their Table 3, so we feel confident in our calculations.
9. This MPER is presented in Table 3 of Costanigro et al. [8].
10. We also estimated a mixture model including the dummy variables as concomitant variables and the contrast between
cluster size and wine prices across the four clusters continued to increase.

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