Journal of Wine Economics
Volume 5 | 2010 | No. 1
FULL TEXT | Pages 1-2
The Journal of Wine Economics now enters its fifth year of existence. Begun as what we anticipated would be a small interest journal for a handful of wine economics enthusiasts, the Journal has quickly grown into a respected publication of economic research. On the supply side, we have received a rapidly growing number of high-quality submissions, book reviews and short communications, allowing us to double the page numbers per issue.
However, not all wine economics research is published in the Journal of Wine Economics. At times, important papers find their way into general economics journals, reaching a con- siderably broader audience. Clearly, “wine economics” is leaving its agricultural niche and is entering a larger stage, a positive development. Nevertheless, the Journal of Wine Economics strives to publish all relevant wine economics research and tries to provide its readers with comprehensive information.
To serve this purpose, we begin this more voluminous than usual issue of the Journal of Wine Economics with a symposium of three papers, all on Bordeaux wine, that have the potential of becoming or already are classics of the subject. It might not be an accident that Editors or Advisory Board members of the Journal of Wine Economics are involved in each of them.
Originally, these papers were presented at a wine economics symposium organized by Alan Duncan and David Greenaway as part of the meetings of the Royal Economic Society, held in 2005 at the University of Nottingham. In 2008, all three papers were published in a special feature section of The Economic Journal. I am very pleased that we can reprint these papers for our readers, and would like to thank the Royal Economic Association for permitting us to reproduce them.
In the first paper, Olivier Gergaud and Victor Ginsburgh study whether quality assess- ments made by wine experts and by consumers (based on auction prices), are determined by terroir or by technology. Given that the chosen technology is not independent of natural endowments, they identify these determinants using an instrumental variables approach. For the relatively homogenous Bordeaux region they find that technological choices affect quality much more than natural endowments.
Héla Hadj Ali, Sébastien Lecocq and Michael Visser analyze the impact of Robert Parker points on Bordeaux en primeur wine prices using a natural experiment. Normally, en primeur prices are set by the chateau after Parker’s visit and assessment. However, in 2003 Parker did not visit the Bordeaux region and en primeur prices were set before Parker’s judgment was made public. The authors find that, on average, the Parker effect amounts to approximately 3 euro per bottle. For highly graded wines, however, it is significantly greater.
Lastly, Orley Ashenfelter examines the quality and prices of Bordeaux wines. He shows that wine prices are determined by the weather conditions during the growing season as well as the age of the wine. The price equation provides a measure of the real rate of return to holding wines (about 2 to 3% per annum) and implies far greater variability in the early or en primeur wine prices than is observed. The analysis provides a useful basis for assess- ing market inefficiency, the effect of climate change on the wine industry, and the role of expert opinion in determining wine prices. This paper is based on prior publications by Ashenfelter that caused a media stir in the late 1980s. The paper contains the seeds of the main strands of wine economics: hedonic pricing, environmental analysis, and finance.
Natural Endowments, Production Technologies and the Quality of Wines in Bordeaux. Does Terroir Matter?
Olivier Gergaud and Victor Ginsburgh
ABSTRACT | Pages 3-21
We study whether quality assessments made by wine experts and by consumers (based on prices obtained at auction between 1980 and 1992), can be explained by variables describing endowments (land characteristics, exposures of vineyards) and technologies (from grape varieties and picking, to bottled wines). However, since technological choices are likely to depend on endowments, the effects can only be identified using an instrumental variables approach. We show that technological choices affect quality much more than natural endowments, the effect of which is negligible. (JEL Classification: L66, Q12, Q13, Q16)
The Impact of Gurus: Parker Grades and en primeur Wine Prices
Héla Hadj Ali, Sébastien Lecocq and Michael Visser
ABSTRACT | Pages 22-39
The purpose of this paper is to measure the impact of Robert Parker’s oenological grades on Bordeaux wine prices. We study their impact on the so-called en primeur wine prices, i.e., the prices determined by the château owners when the wines are still extremely young. The Parker grades are usually published in the spring of each year, before the wine prices are established. However, the wine grades attributed in 2003 have been published much later, in the autumn, after the determination of the prices. This unusual reversal is exploited to estimate a Parker effect. We find that, on average, the effect is equal to 2.80 euros per bottle of wine. We also estimate grades-specific effects, and use these estimates to predict what the prices would have been had Parker attended the spring tasting in 2003. (JEL Classification: C21, D89, L15)
Predicting the Quality and Prices of Bordeaux Wine
ABSTRACT | Pages 40-52
Bordeaux wines have been made in much the same way for centuries. This article shows that the variability in the quality and prices of Bordeaux vintages is predicted by the weather that created the grapes. The price equation provides a measure of the real rate of return to holding wines (about 2–3% per annum) and implies far greater variability in the early or ‘en primeur’ wine prices than is observed. The analysis provides a useful basis for assessing market inefficiency, the effect of climate change on the wine industry and the role of expert opinion in determining wine prices. (JEL Classification: D43, Q11)
Prohibition and Repeal: A Short History of the Wine Industry’s
Regulation in the United States (FULL TEXT PDF)
Barbara C. Beliveau and M. Elizabeth Rouse
ABSTRACT | Pages 53-68
The United States wine industry has experienced tremendous growth in the past twenty-five years. The number of wineries in the United States has grown to almost 5000, located in all fifty states, and creating over a million full time jobs. Alcohol distribution laws that hinge on the Supreme Court’s reconciliation of the Twenty-first Amendment and the Commerce Clause have significantly hindered the industry’s ability to expand. Current interpretations of the 21st Amendment give states unprecedented freedom to regulate interstate commerce in alcoholic beverages. The resulting regulatory diversity presents problems both domestically and internationally. (JEL Classification: K2, L5, N4)
The Stock Market Reaction to Court Decisions Related to Differential Treatment of In-State and Out-of-State Internet Wine Sales
ABSTRACT | Pages 69-86
This paper analyzes stock market reaction to court decisions related to the differential treatment of in-state and out-of-state internet wine sales. Several states had differential laws governing internet sales of wine directly to consumers for in-state and out-of-state wineries. These laws were possibly more harmful to small wine producers as their products are less likely to be carried by retailers. In May of 2005, The Supreme Court of the United States declared these practices unconstitutional. Prior to the Supreme Court granting the writ of certiorari there was a circuit split on the issue. Our study seeks to measure the impact of the Courts’ decisions on the stock returns of wineries using standard event study methodology. The results show a negative stock market reaction to publically traded large wineries to the Supreme Court ruling. It appears that differential treatment laws were, indeed, beneficial to the large wineries. (JEL Classification: G18, Q28)
Wine as an Alternative Asset Class
Philippe Masset and Caroline Henderson
ABSTRACT | Pages 87-118
Using a dataset that spans the period 1996 to 2007 and contains transaction prices for all reported auctions at the Chicago Wine Company, we analyze how the prices of high-end wines have evolved during this time period. The best wines according to characteristics like vintage, rating and ranking earn higher returns and tend to have a lower variance than poorer wines. Nevertheless, the different categories of wines seem to follow a rather similar trend over the long run. Wine returns are only slightly correlated with other assets and can consequently be used to reduce the risk of an equity portfolio. Wine looks even more attractive when the investor also has concerns about the skewness of his portfolio. However, the part to be invested in wine is reduced once the kurtosis is included into the analysis. Finally, it seems advisable to diversify across different wine categories as their short-run movements are partially independent of each other. First growths and wines rated as extraordinary by Robert Parker deliver the best tradeoff in terms of portfolio expected returns, variance, skewness and kurtosis for most investor preference settings under consideration. (JEL Classification: C60, G11, Q11)
Wine Investment and Portfolio Diversification Gains
James J. Fogarty
ABSTRACT | Pages 119-131
The existing literature on the return to wine is mixed. Some studies have found wine to be an unattractive investment option and others have found wine to be an investment class that provides excess risk adjusted returns. However, provided the return to wine does not have a strong positive correlation with standard financial assets, even if the return to wine is low, it is possible that including wine in an investment portfolio will provide a diversification benefit. Here the repeat sales regression methodology is used to estimate the return to Australian wine, and the return is shown to be lower than for standard financial assets. Several measures are then used to show that despite the return to Australian wine being lower than the return to standard financial assets, wine does provide a modest diversification benefit. (JEL Classification: G11, G12)
The Evaluation of Wine Judge Performance through three Characteristics: Bias, Discrimination, and Variation
Jing Cao and Lynne Stokes
ABSTRACT | Pages 132-142
Judge performance is a critical component of a wine competition’s success. A number of studies have shown that wine judges may differ considerably in their opinions. In this paper, we have conducted an in-depth examination of wine judge performance at a U.S. wine competition. Three characteristics of judge’s performance are examined: bias, discrimination ability, and variation. Based on the analysis, we can identify the judges who had discrepant scoring patterns and can gain insight into which of the three characteristics cause particular judges to disagree. The evaluation of wine judge performance through these three characteristics may provide useful information for training them to have consistent performance and in assisting competition coordinators in judge selection. (JEL Classification: C1, D8, Q13)
Do Tasting Notes Add Value? Evidence from Napa Wines
Carlos D. Ramirez
ABSTRACT | Pages 143-163
This paper evaluates whether tasting notes—the brief testimony that describes the sensory properties of wines—add value. The analysis is based on a sample of over 2700 recent-vintage cabernet sauvignon wines evaluated by Wine Spectator. I estimate a dynamic wine price model to evaluate the marketing effect of the note, controlling for quality measures as well as other wine characteristics. The results indicate that the length of the tasting note exerts a strong positive influence on the wine’s price, even after controlling for quality. A 10 percent increase in the number of characters in the tasting note (about 23 additional characters) contributes about two to four dollars to the price of the wine. Further analysis reveals that the value of the tasting note does not come from the “analytical” words contained in the note but rather, from the more subjective component of it. (JEL Classification: L66, L11, C23)
The Economic Impact of the Wine Industry on Hotels and Restaurants: Evidence from Washington State
ABSTRACT | Pages 164-183
YWashington State enjoys an extraordinarily fast growing wine industry and is now the second largest wine producing state in the U.S. This paper examines the impact of this growth on the revenue of hotels and restaurants. Employing a dynamic quarterly panel model at the county level we show that the regional reputation as high quality wine county, as expressed by critical wine points in the national wine press, has a significant effect on the tourism industry. For Walla Walla, the most prominent wine county in the state, less than 17% of all restaurant and approximately 40% of all hotel revenue is tied to the wine cluster (2007). However, regional reputation is not long-living and needs constant replenishment. (JEL Classification: R11, R15, Q19)
Letter to the Editors
Book & Film Reviews
AMY B. TRUBEK
The Taste of Place: A Cultural Journey into Terroir
Reviewed by Jaclyn Rohel
The Wine Lover’s Guide to Auctions. The Art and Science of Buying and Selling Wines
Reviewed by Mark Heil
Building a Meal: From Molecular Gastronomy to Culinary Constructivism
Reviewed by Peter Musolf
Uncorked: The Science of Champagne
Reviewed by Peter Musolf
Liquid Memory: Why Wine Matters
Reviewed by Peter Musolf
What Price Bordeaux?
Reviewed by Lawrence R. Coia
ROBIN GOLDSTEIN & ALEXIS HERSCHKOWITSCH
The Wine Trials 2010: The World’s Bestselling Guide to Inexpensive Wines
Reviewed by Nathaniel Baum-Snow
ROBERT M. PARKER
Parker’s Wine Bargains: The World’s Greatest Wine Values Under $25 Glass
Reviewed by Robin Goldstein
George E. Johnson
by Orley Ashenfelter