Reputational effects on third-party agents: A study of the market for fine and rare wines

Abstract

We examine the effectiveness of a quality assurance mechanism that relies on a third-party's reputation. We focus on the market for fine and rare wines where auction houses intermediating between sellers and buyers have also claimed expertise to assess product authenticity. An auction house's reputation can sustain product quality in this market only if consumers absorb relevant information and reduce demand through houses who fail at screening out counterfeits. We test the existence of such reputational effects by studying the market responses to a major disclosure from 2012 of three auction houses having auctioned thousands of bottles of fake wine. We find that these houses did suffer reputational losses. These losses are demonstrated over the following year by a decrease in equilibrium sales prices of all wines, and a decrease in sales quantities of older wines, relative to other houses.