Table of Contents and Chapter Abstracts
(book abstract)
Table of Contents
Introduction (abstract)
1 The Economic Approach to the Study of Wine (abstract)
2 The Wine Product (abstract)
3 Wine Sensory Characteristics (abstract)
4 Grape Growing (abstract)
5 Grape Markets and Supply Cycles (abstract)
6 Wine Production (abstract)
7 Bulk Wine, Private-Label Wine, and Wine Alcohol (abstract)
8 Wine Distribution and Government Regulation (abstract)
9 The Wine Firm (abstract)
10 Wine-Firm Behavior (abstract)
11 The Wine Consumer and Demand (abstract)
12 The Wine Consumer, Quality, and Price (abstract)
13 The Globalization of Wine (abstract)
Conclusion (abstract)
Chapter Abstracts
The U.S. wine industry is growing rapidly and wine consumption is becoming an increasingly important part of American culture. As the demand for wine knowledge by the public increases, wine economics is emerging as a new field of academic study. Numerous books have been written about wine appreciation, tasting, history, culture, and business. While many of these describe various economic aspects of wine, American Wine Economics is unique in that it provides a unified and systematic treatment of the U.S. wine industry from an economic perspective. It has a threefold purpose. First, it gives a detailed description of the economic organization of the U.S. wine industry. Information is provided about the unique attributes of the wine product; grape growing, wine production, and wine distribution activities; wine firms and consumers; and grape and wine markets. Second, it uses economic principles to explain how grape growers, wine producers, distributors, retailers, and consumers interact and behave in the wine market. Lastly, it summarizes findings and presents insights from the growing body of studies related to wine economics. American Wine Economics is intended for both students of economics and anyone else who is interested in learning more about the economics of wine.
The wine industry is becoming an increasingly important part of the U.S. economy and American culture. Moreover, it has a number of economic characteristics that make it uniquely interesting to study. It is a highly regulated industry with thousands of firms ranging in size from small family run businesses with non-profit objectives to large modern corporations whose goal is to maximize profits. Wine consumers and producers often display seemingly uneconomic or irrational behavior. Wine is a complex and intriguing product with unique qualities that make it significantly different from a typical manufactured good. Because of these attributes, the wine industry lends itself to an interesting and entertaining application of economic concepts.
Chapter 1: The Economic Approach to the Study of Wine
The economic approach to the study of wine applies a set of basic principles to explain the economic organization of wine production and consumption activities, and how wine producers, consumers, and other participants in the wine market interact and behave. This chapter focuses on the important economic concepts of scarcity, choice, opportunity cost, rational self-interest, and economic incentives. These concepts are used to develop the logic of wine consumer and firm choice and the principles of individual demand and supply. Supply and demand analysis is then presented as an analytical tool that can be used to organize our thinking about how buyers and sellers interact in the wine market. Numerous applications of economic concepts to wine related phenomena are provided.
Wine is a complex product with unique qualities that make it significantly different from a typical manufactured good. This chapter focuses on the nature of the wine product as both an agricultural good made from grapes by the natural process of fermentation and an economic good valued by consumers and governed by the market forces of supply and demand. From an economic perspective, wine is viewed as a class of more than 15,000 differentiated products that possess a common bundle of sensory and non-sensory characteristics. Wine quality involves consumer evaluation of these wine attributes based on personal tastes and preferences and is revealed in the marketplace by the amount of money a consumer is willing to pay for a wine product. This concept of wine quality differs from the one preferred by many wine professionals who believe that quality should be evaluated by objective criteria independent of consumer tastes.
Chapter 3: Wine Sensory Characteristics
To provide a better understanding of the nature of the complex wine product, this chapter discusses the sensory characteristics of wine drawing from the literature on wine appreciation and science. Knowledge of how wine professionals think about and describe the appearance, smell, and taste of wine is relevant to wine economics. These professionals are either direct participants in the wine industry or influence others who make economic decisions in this market. This background is necessary to understand grape growing and wine production activities, and the economic choices and trade-offs that confront producers in the wine industry. Knowledge of sensory characteristics and how they may be measured is also useful for interpreting economic studies of wine quality and price.
The most important input used to produce wine is grapes. This chapter examines the economic activity of grape growing. It begins with a discussion of the grape input decision. This involves choosing a vine species, variety, clone, and rootstock. It then focuses on planting, growing, and harvesting decisions related to wine economics. Numerous options are available to commercial vineyards and wine firms in growing grapes, and the specific decisions that are made affect both the quality of the final wine product and cost of producing it. In general, a trade-off exists between the goals of improving grape and wine quality and lowering production cost. To provide a higher quality product, firms must typically incur a higher cost.
Chapter 5: Grape Markets and Supply Cycles
Growers must choose the amount of grapes to produce and the manner in which to sell them. Grapes can be sold on a spot market or a long-term contract market. Many wine market observers believe the way in which growers make output decisions produces regularly recurring grape supply and price cycles that culminate in repeated periods of boom and bust. This chapter provides a description of the institutional features of the market for wine grapes and an economic analysis of the cyclical nature of wine grape production and prices. Recurrent periods of grape underproduction and high prices and overproduction and low prices are explained in the context of supply and demand analysis by a well-known economic theory called the cobweb theory.
This chapter examines the economic activity of wine production and emphasizes the pivotal role of the winemaker in the determination of the quality and cost of wine products. Producing wine involves choosing one or more grape varieties for a particular wine type, crushing and fermenting the grapes, and maturing, blending, clarifying, and stabilizing the resulting wine. The finished wine can be either packaged in bottles for sale to consumers, or left unpackaged and sold on the bulk wine market. In each stage of the winemaking process, numerous choices must be made; each decision affects the quality and cost of the wine produced. Like grape growing, a trade-off generally exists between improving wine quality and lowering cost.
Chapter 7: Bulk Wine, Private Label Wine, and Wine Alcohol
This chapter focuses on three important topics related to wine production: bulk wine, private label wine, and wine alcohol. The bulk wine market is an indispensable part of the wine business that increases wine firm efficiency and the range of products available to consumers. The organization and role of the bulk wine market are explained, and a supply and demand framework is used to analyze factors that affect the price and quantity of this intermediate good. Closely related to bulk wine is private label wine, a fast growing segment of the U.S. wine market. The forces underlying the trend toward private-label wine and its potential impact on the future structure of the wine industry are discussed. Lastly, this chapter examines whether the high and rising alcohol content of wine is the unintended outcome of global warming as many winemakers contend, or the result of rational decisions of wine proprietors.
Chapter 8: Wine Distribution and Government Regulation
The wine distribution system in the United States is very complex. Each state has its own regulations governing the distribution and sale of alcoholic beverages. Most wine products are delivered to consumers through a highly regulated three-tier distribution channel. Wine firms are required to sell their products to licensed distributors, who sell them to licensed retailers, who sell them to consumers. This chapter examines the intricacies of the wine distribution system, why states regulate the distribution and sale of wine, and why wine regulations differ across states. The economic theory of regulation is used to explain observed regulatory activity associated with the wine industry over the past fifty years. This chapter also examines the economic effects of these regulations on consumers, producers, distributors, and retailers, and whether they serve the public interest or special interest.
This chapter views the wine firm as a legal entity that organizes and coordinates grape growing, winemaking, and wine distribution activities necessary to produce and sell wine to consumers. These activities can be performed by the wine firm itself or outsourced to other firms in the marketplace through contractual arrangements. This chapter focuses on the wine firm as both a legal and economic entity, the different ways a wine firm can be organized, the types of contracts it can enter, and the economic implications of different organizational forms and contractual arrangements. It also examines whether wine firms with non-profit objectives can survive in an industry with profit-maximizing firms, and provides a description of important structural characteristics of the wine market that constrain firm choices.
Chapter 10: Wine-Firm Behavior
This chapter analyzes wine firm behavior. It provides an explanation of how wine firms choose the price and quality of their products and communicate information about quality to consumers. It also examines wine firm behavior in organizing and coordinating grape growing, winemaking, and wine distribution activities. George Akerlof’s “lemons theory” is used to explain why wine firms have an economic incentive to provide quality signals to consumers, and the types of signals they convey. The theories of oligopoly and monopolistic competition are applied to explain how wine firms choose the price and quality of their products in the low-price commodity segment and higher-price premium and luxury segments of the wine market. Concepts from neoclassical and transaction-cost economics, and firm capabilities theories are used to explain wine firm insourcing and outsourcing decisions.
Chapter 11: The Wine Consumer and Demand
This chapter begins by describing the demographic characteristics of U.S. wine consumers and notable trends and patterns in wine sales, quantity consumed, and prices. The economic theory of rational choice is then used to explain how consumers behave in the wine market and analyze the effect on wine consumption of the price of wine, income, prices of goods related to wine, and consumer tastes and preferences. Empirical studies from the emerging field of wine economics verify that the law of demand applies to the purchase of wine products, and therefore a typical wine consumer behaves as if she is rational. Other findings of wine demand studies are also discussed in detail.
Chapter 12: The Wine Consumer, Quality, and Price
This chapter focuses on how economists measure wine quality and analyze the relationship between quality and wine price. Hedonic price theory is used to provide an intuitive explanation of the consumer’s wine quality choice. The methodology and results of empirical studies that use the hedonic approach to analyze the relationship between wine characteristics and price are discussed in detail. These characteristics include the appearance, smell, and taste of wine; wine scores; grape variety; terroir; vintage; as well as other attributes. The findings of these studies are used to examine the amount consumers are willing to pay for different wine characteristics, whether critic wine scores reflect or affect consumer preferences, the informational efficiency of wine markets, as well as other issues related to consumer behavior.
Chapter 13: Globalization of Wine
The wine industries of countries around the world are becoming increasingly integrated. Today, the U.S. wine industry is part of a global wine market. Much of the world’s wine is produced in one country and consumed in another country. A host of multinational wine firms and winemaking consultants operate in multiple countries around the world. A variety of wine products, including global wine brands characterized by an international wine style, are available to consumers worldwide. This chapter describes the structure of the global wine market, the extent to which the U.S. participates in this market, and the effect of globalization on U.S. wine producers and consumers.
The purpose of this book has been to explore wine in America from an economic perspective. The main goal has been to explain the economic organization of the U.S. wine industry, and how individuals interact and behave in their role as wine consumers, producers, distributors, retailers, and information specialists such as wine critics. A set of fundamental economic concepts and principles have been used to organize the approach taken to the study of wine. This chapter highlights and summarizes insights from these guiding principles and the results of empirical studies from the emerging field of wine economics.