AAWE, Economics Dept, New York University, 19 W 4th St, 6Fl., New York NY 10012aawe@wine-economics.org

Category archive: Working Papers

AAWE Working Paper No. 194 – Economics

Gravity and pricing to market (PTM) models have been used to elaborate determinants of bilateral trade and export pricing for different countries and branches. Typically, only one of the two methods was chosen. We show in a stepwise approach that a combination of both methods yields novel results on the determinants of exports and export pricing behaviour. For the case of German beer exports, we show that structural differences exist between markets on which exporters apply either PTM or non-PTM strategies. German beer exporters apply PTM strategies, in particular local-currency stabilization, on those markets where imports are very sensitive to exchange-rate changes. Non-PTM strategies, i.e. full exchange-rate transmission, occur on export markets with insensitive reactions. Apart from PTM strategies, German beer exports are strongly dependent on policy variables such as the introduction of the Euro and the partner country’s membership in the EU.

AAWE Working Paper No. 194 – Economics

AAWE Working Paper No. 193 – Economics

Wine is mostly sold in closed bottles that prevent buyers from inspecting their contents. This practice turns wine into an experience good which buyers are unable to asses at the time of purchase. In order to reduce buyers’ information gaps, wine sellers provide information about the wine on one or several labels attached to the bottle. Wine buyers’ problem then is to interpret this information and to assess its veracity. Institutional arrangements have emerged in Germany, as in other wine producing countries, that standardize communication between wine sellers and buyers, and that reduce the risk of wine buyers being misled by the information provided by the sellers. Core elements of the institutions are (i) verifiable wine quality categories or grades, (ii) wine examination by independent experts and certification of the information items provided by the wine bottler, and (iii) rules for the content and form of labeling information. Wines that satisfy all legal requirements for a quality wine are deemed to be “Tested Quality in the Glass”. They are recognizable by a number that is issued for each wine that has passed examination; the number must be printed on the label. The objectives of this study are three: (i) to provide an English-language description of the German wine quality certification system, together with a summary of its legal basis; (ii) to describe an alternative private wine certification system that has been grafted onto the pubic system, and (iii) to encourage readers to think about how datafication of wine and digitization of wine certification may transform the “Tested Quality in the Glass” system. The study is of interest to all wine experts and scholars with an interest in wine certification, especially of German wines.

AAWE Working Paper No. 193 – Economics

AAWE Working Paper No. 192 – Economics

Cardebat and Paroissien (2015) have provided a new methodology to express the scores of different wine expert on the same rating scale. Their method consists in matching the quantiles of the distributions of each experts’s scores in an exhaustive dataset. However, they use the raw empirical distribution functions, which is arguably downward biased. This leads to a frequent upward bias in the converted scores. This paper exhibits the existence of this bias, provides the sign of the latter, and suggests a simple interpolation to mitigate it.

AAWE Working Paper No. 192 – Economics

AAWE Working Paper No. 191 – Economics

Canada has a small, but vibrant winemaking industry. Since the US-Canada Free Trade Agreement (FTA), which went into effect in 1987, growers have shifted to vinifera grapes and modern winemaking techniques and there has been an explosion in the number of wineries, which number about 150 in the Niagara peninsula alone. However, their share of the Ontario wine market, which fell with free trade, has continued to decline. This paper delves into the reasons for the downward trend.
Ontario provides a unique source of data on the wine market, since a single price for each wine is enforced by the Liquor Control Board of Ontario (LCBO). The paper analyses data downloaded from the LCBO’s website at the end of 2012 for all Ontario white table wines available for sale, and for wines from both “old world” (France and Italy) and “new world” (Argentina and Chile) wine producers. It is shown that after controlling for wine characteristics Ontario wines are higher priced than their competitors. This helps to explain why, despite improvements in the quality of Ontario wines, the share of imports in LCBO sales has risen. Certain wine varieties, in particular Chardonnay and Riesling, command higher prices, while in Vintages stores (but not in ordinary LCBO outlets), both the age of the wine and alcohol content have a significant positive effect on price. In terms of exports, Canada is miniscule on the world wine market, and it does not have a revealed comparative advantage in wine (except for ice wine).
In addition to the disadvantage on input costs, Ontario wine production also suffers from an industry structure that limits the extent that most wineries can exploit economies of scale. A limit in the number of off-winery stores–included in the FTA and subsequently NAFTA to prevent further protection of Canadian wines–has led to an uneven playing field in which two firms, one now American owned, operate the vast majority of those stores. Other wineries are limited to selling through the LCBO or at the winery. Further development of Ontario’s wine industry is likely to require opening up wine retailing to allow all wineries to benefit equally. In order to avoid the strictures of NAFTA, this would have to mean opening up competition to a wider range of wine retailers able to sell both domestic and imported wines.

AAWE Working Paper No. 191 – Economics

AAWE Working Paper No. 190 – Economics

Eco-labels are part of a new wave of environmental policy that emphasizes information disclosure as a tool to induce environmentally friendly behavior by both firms and consumers. Little consensus exists as to whether eco-certified products are actually better than their conventional counterparts. This paper seeks to understand the link between eco-certification and product quality. We use data from three leading wine rating publications (Wine Advocate, Wine Enthusiast, and Wine Spectator) to assess quality for 74,148 wines produced in California between 1998 and 2009. Our results indicate that eco-certification is associated with a statistically significant increase in wine quality rating.

AAWE Working Paper No. 190 – Economics

AAWE Working Paper No. 189 – Economics

In this paper we develop an original approach to evaluate the costs and benefits associ- ated to a generic promotion program using an application to Bordeaux wines. The benefit is computed from the marginal impact of the collective reputation of the program on the individual reputation of its members. These different marginal impacts are estimated us- ing detailed survey data about the image of Bordeaux wines in seven European countries. We find positive and significant spillover effects from the umbrella reputation (Bordeaux) that moreover increase with the individual reputation level of the wine. Controlling for the natural endogeneity of the collective reputation in this setup, we capture the impor- tant fact that this relationship is faced with marginal diminishing returns. These spillover effects, when significantly positive, vary from a minimum of 5% to a maximum of 15% of additional favorable quality opinions. We then show that some subregions are more likely to benefit from generic promotion programs, suggesting that fees should be established on a benefit-cost basis.

AAWE Working Paper No. 189 – Economics

AAWE Working Paper No. 188 – Economics

Although evidence for anchoring effects has been produced in experimental settings, there have been relatively few studies testing for anchoring in actual markets. We analyze a large data set of vineyard sales in the Champagne region of France to de- termine whether Echelle Des Crus (EDC) ratings are an anchor in the land market. The EDC is a set of numerical scores for villages in the region that was used as part of a price-setting system for wine grapes that began in 1919 and persisted until 1990. Although grape prices are now determined in a market and the EDC no longer plays a direct role in determining them, we test whether the EDC continues to be an an- chor for participants in the land market. The econometric challenge is to separately identify anchoring effects from the effects of relevant information the EDC may convey about vineyard quality. We instrument for the EDC using the average attributes of vineyards in neighboring villages, which are unlikely to be correlated with errors in prices because only the characteristics of the vineyard itself affect the rents from grape production. We find strong evidence for anchoring effects in the land market, which is further supported by analyses of grape prices. We also examine whether the anchoring effect is diminishing over time as market participants come to rely more on objective information to determine prices. We find, instead, that effect of the EDC persists many years after it became obsolete.

AAWE Working Paper No. 188 – Economics

AAWE Working Paper No. 187 – Business

After decades of inflationary applied advertisement investments in tv-, print and online media, todays’ consumers are exhausted. They switch tv-channels when commercials are being broadcasted, they bin promotion material when checking the letter box, they erase online- newsletters without having read them. ‘Wines of Germany’ (Deutsches Weininstitut DWI) conquers the given situation with word-of-mouth (WOM) marketing and –communications work. Presentations, seminars, press-, online- and social media work as well as conceptual sales impulses for the on- and off trade or gastronomy all serve a common goal: credible WOM recommendations. Combined with innovative and emotional communications work, the WOM action led to an increase in public awareness for Wines of Germany. It correlates with a moderate but steady increase in domestic and export value in an extremely competitive market. On the long run, memorable encounters of real people in real life situations (WOM) play a more effective and therefore central role in the sought-after awareness upswing then solely advertisements.

It must be frustrating for marketing experts that it is increasingly difficult to actually reach people. Social media marketing (SMM) made us believe that there’s an easy way to consumer’s attention – but it turned out to be more complicated: first of all social media activities always ask for authenticity, it never works to simply utilize existing promotion posters vertically through all media channels. People are very sensitive when it comes to credibility. Secondly, e.g. Facebook posts are not automatically being projected in your peer’s timeline any more (without paying for it). The more effective way is to reach influencers and multipliers through memorable situations, in order to make them tell your story/ spread your word (WOM). Therefore, DWI focuses on “ambassadors” – internally within the branch as well as externally in relations to the public – in order to initiate as many WOM impulses as possible.

AAWE Working Paper No. 187 – Business

AAWE Working Paper No. 186 – Economics

We explore whether the global financial crisis has had heterogeneous efects on traded goods differentiated by quality. Combining a dataset of Argentinean firm-level destination-specific wine exports with quality ratings, we show that higher quality exports grew faster before the crisis, but this trend reversed during the recession. Quantitatively, the effect is large: up to nine percentage points difference in trade performance can be explained by the quality composition of exports. This flight from quality was triggered by a fall in aggregate demand, was more acute when households could substitute imports by domestic alternatives, and was stronger for smaller firms’ exports.

AAWE Working Paper No. 186 – Economics

AAWE Working Paper No. 185 – Business

Over the last years there has been a debate about the “structural change” in emerging economies and their impact on the understanding of development. New types of structuralisms are discussed using the concept of value chain in certain production sectors that have undergone significant changes.

The objective of this paper is to contribute to the debate about the structural change of the Argentine grape-wine growing sector using the dual analysis of “Strengths and Governance”.

First of all, we wish to point out that viticultural production is carried out in imperfect markets where prices are the result of an asymmetric negotiation between the purchasing power of a demand that is concentrated in a few firms and an atomized supply that is in the hands of thousands of producers. We analyze the strengths resulting from the interaction between the internal factors characteristic of the production unit and the external forces that operate within a given business organization. We describe the manner in which the supplier is related to the resources and the markets. We combine the above analysis with the governance approach, which refers to the manner in which the relationship among the several actors engaged in grape-wine growing is governed. We also analyze the relationships between firms and institutional mechanisms through which coordination actions are implemented outside the market. Emphasis is laid on the importance of explicitly incorporating institutionality into the analysis of the grape-wine growing sector chain so as to make sure that enforcement agencies comply with decisions reached by “consensus”.

One first conclusion of the study refers to the complementariness of both approaches and, in both cases, there is a continuous segment that spans from “decentralized coordination to a more centralized one”. By learning how value chains are governed, it is possible to know how they affect suppliers’ “upgrade” (increasing the added value of the chain through innovation). The upgrade is illustrated with a case study in which the knowledge acquired by the innovative firm is spread within the grape-wine growing sector, giving rise to a positive externality that may be internalized by means of suitable public policy instruments.

AAWE Working Paper No. 185 – Business

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