Notes
INTRODUCTION
1. Wine industry statistics provided in the Introduction are discussed in detail in subsequent chapters and data sources are given.
2. Throughout this book, the terms commodity, premium, and luxury wine are used to distinguish between wine products of different quality sold at different price points. Commodity wine is at the bottom of the quality-price hierarchy and is typically produced in large volume. Premium wine is considered to be of higher quality and sold at a higher price point. At the top of the hierarchy is luxury wine, which commands the highest price and typically receives the highest scores from wine critics, reflecting its high perceived quality.
CHAPTER 1: THE ECONOMIC APPROACH TO THE STUDY OF WINE
1. The value of a person’s time is highly subjective and differs across individuals. At best, the wage rate is an approximation of the opportunity cost of time, and it is a better measure for some individuals than for others.
2. More generally, utility can be thought of as an index of preference. To say an individual derives more utility from a bottle of Cabernet Sauvignon than a bottle of Merlot is another way of saying she prefers the Cabernet to the Merlot because the Cabernet better satisfies her wants and desires.
3. To explain and predict individual choice and behavior, it is not necessary for people to consciously weigh the benefit and cost of each alternative; all that is necessary is that they “behave as if” they use this decision-making logic. If they do, then economic theories based on the assumption of rational decision-making will be effective in explaining and predicting the behavior of an average or typical individual, not of each and every individual.
4. The law of diminishing marginal utility is often justified by satiety and hierarchy of uses arguments. For a typical KJ consumer like Jill, drinking a first bottle when she has had none during a given week is very enjoyable, but consuming say a third bottle in the same week is less pleasurable, because she has already had two. After having consumed four bottles of KJ, opening a fifth yields no extra satisfaction; it has become tiresome. However, there are a number of different ways in which a bottle of KJ can be consumed. It may accompany a meal, serve as an aperitif, given to a friend as a gift, used for cooking, etc. A consumer values all of these uses, but some are more satisfying than others.
5. If the firm is experiencing a loss, then it reduces this loss by $30,000.
6. In this example, grapes are a self-owned variable input.
7. It should be noted that higher wine consumption at higher prices and lower consumption at lower prices does not violate the law of demand; the change in income shifts the entire demand curve, causing a change in both equilibrium price and quantity.
CHAPTER 2: THE WINE PRODUCT
1. Most of the world’s wine is made from grapes; however, any fruit or vegetable that contains sugar can be fermented into a wine-like beverage. The product of interest in this book is grape wine.
2. Robinson 2006, 267–68; Kramer 2003, 79–100.
3. For a discussion of the product characteristics approach to consumer and producer behavior, see Lancaster 1966 and Rosen 1974.
4. Bottled wine sold in the United States is required by law to have a label approved by the Alcohol and Tobacco Tax and Trade Bureau. The label must provide certain information, such as a brand name, wine category, and alcohol content. Most labels also provide additional information, such as vintage and grape variety. Note that two or more wine products sold by the same wine firm can have the same brand name, and the number of wine products therefore exceeds the number of wine brands.
5. Wine products may be differentiated in a number of ways. I emphasize the qualitative differences in wine products that result from perceived differences in sensory characteristics. However, consumers might also perceive the wine product of one producer to be somewhat different from those of others because of bottle and label design, brand name, and advertising. These types of characteristics not related to appearance, smell, and taste are considered later in the book.
6. The most notable exception is when consumers sample wine at a winery’s tasting room before purchase.
7. For different perspectives on the notion of wine quality, see Penn 2001, MacNeil 2001, 2–8, Kramer 2003, 21–34, Charters and Pettigrew 2003, and Robinson 2006, 557–58.
8. See McCoy 2005 for an engaging account of Robert Parker’s life and his influence on the wine industry.
9. See www.erobertparker.com/info/legend.asp for Parker’s rating system.
CHAPTER 3: WINE SENSORY CHARACTERISTICS
1. The material in this chapter draws largely from Robinson 2000, MacNeil 2001, Casamayor 2002, Kolpan et al. 2002, Kramer 2003, Sharp 2005, Goode 2005, Ewing-Mulligan and McCarthy 2005, Robinson 2006, and Lewin 2010.
2. Goode 2005, 181–82.
3. Mega Purple is a sweet, richly colored concentrate made from a French hybrid grape called Rubired. It is widely used by winemakers to augment the color and sweetness of red wine, but is virtually unknown to wine consumers. Some consider it winemakers’ “dirty little secret” and believe its use should be prohibited, because it is an artificial way to enhance color and flavor. However, it is a less costly way to enrich the color of a red wine than blending. Lewin 2010, 124–26.
4. Robinson 2000, 13–14.
5. See Kolpan et al. 2002, 97, for a picture of the wine aroma wheel.
6. Robinson 2006, 273–74.
7. Casamayor 2002, 34–36.
8. Robinson 2006, 290.
9. Ewing-Mulligan and McCarthy 2005, 10–16.
10. For a sampling of different quality standards used by different wine professionals, see Robinson 2000, 36–41, Ewing-Mulligan and McCarthy 2005, 16–23, MacNeil 2001, 2–6, Kramer 2003, 25–28.
11. Goode 2005, 31.
12. Quandt 2007.
13. Goode 2005, 174.
14. Weil 2007.
15. Goode 2005, 180–81.
16. Ramirez 2010.
CHAPTER 4: GRAPE GROWING
1. The material in this chapter about wine grapes and viticulture comes largely from Halliday and Johnson 2007, Robinson 2006, Goode 2005, Lewin 2010, Priewe 2005, MacNeil 2001, and Law 2005.
2. To illustrate differences in varietal characteristics and affinity for blending consider two popular red grapes: Cabernet Sauvignon and Pinot noir. Cabernet Sauvignon is a small, dark blue, thick-skinned grape, with large seeds, high levels of tannin, acidity, and color pigment. It has substantial flavor compounds suggestive of blackcurrant. It is a naturally vigorous, high-yielding vine that grows best in warm climates, and the grapes ripen slowly and late in the growing season, achieving relatively high sugar and alcohol levels. Because of its high tannin, acidity, and concentrated flavor compounds, it can produce wine with the ability to age for many years. Blending with other grapes, such as Merlot and Cabernet Franc, has the potential to improve its taste profile by creating a rounder mouthfeel and providing complementary flavors. In contrast, Pinot noir is a somewhat larger, violet-colored, thin-skinned grape, with smaller seeds, higher acidity, lower tannin and color pigment, and flavor compounds reminiscent of red berry and cherry fruit. It is less vigorous, with a lower grape yield, ripens early in the growing season, and prefers a relatively cool climate. It typically lacks the ability for long aging, and does not blend well with other grapes. Consequently, a wine labeled Pinot noir typically contains 100 percent of this grape variety, whereas a wine sold in the United States labeled Cabernet Sauvignon may consist of as little as 75 percent of the Cabernet grape with the remaining 25 percent accounted for by one or more blending grapes.
3. Kramer 2004, 61–62.
4. Clonal selection can have a significant effect on the taste profile of certain grapes, such as Pinot noir and Syrah. Depending on the clone selected, Pinot noir can have dark fruit and cola flavors in addition to the more characteristic red cherry and berry flavors. Syrah can exhibit a range of tastes from blackberry to blueberry to coffee to leather. Kramer 2004, 70.
5. Kolpin et al. 2002, 143.
6. MacNeil 2001, 25.
7. See Gale 2011 for a detailed historical account of phylloxera.
8. The precise meaning of terroir and its effect on wine quality are widely debated. For good discussions of the notion of terroir, see Goode 2005, 25–34, Halliday and Johnson 2007, 19–26, and Lewin 2010, 41–67.
9. Kramer 2003, 9–10.
10. Teague 2011 estimates that the Paul Hobbs winery recently paid $25,000 for a ton of Cabernet Sauvignon grapes from the To Kalon vineyard in Napa Valley, owned by the independent grape grower Andy Beckstoffer. The average price of a ton of Napa Valley Cabernet Sauvignon grapes is about $4,000. Teague also reports that Beckstoffer Vineyards recently paid $3.9 million for the thirteen-acre Hayne Vineyard in the Napa Valley.
11. Ashenfelter 2010. Studies that analyze the relationship between vintage-related weather and wine quality and price are discussed in detail in chapter 12.
12. Old World Countries are those with a long history and tradition of producing wine, including France, Germany, Italy, and Spain. New World Countries have a much shorter wine production history and include the United States, Australia, Chile, Argentina, New Zealand, and South Africa.
13. Halliday and Johnson 2007, 20. Halliday and Johnson also suggest that vineyard owners in France have an economic incentive to promote the idea that the mineral content of the soil is the most important determinant of grape and wine quality, because this results in a greater demand for mineral-rich vineyard land in France, which leads to higher land prices. Taber 2011, 14, argues that wine firms often promote the uniqueness of their vineyard soil as a marketing gimmick so that they can charge a higher price for their wine.
14. U.S. Department of Commerce 2011; Motto Kryla & Fisher and Wine Institute 2007.
15. An alternative measure of yield used in many European countries is the amount of wine that can be produced per acre of vineyard land. This productivity measure depends not only on tons of grapes per acre but also on assumptions about several wine-production-related variables. Under a reasonable set of assumptions, one ton of grapes can produce about 750 standard bottles (750 ml, or 25.4 oz, per bottle) or 62.5 twelve-bottle cases.
16. This estimate is based on data from Kramer 2004, 79.
17. Halliday and Johnson 2007, 51–53.
18. According to Alston et al. 2011b, year 2008 Cabernet Sauvignon average yield per acre for selected California North Coast, Central Coast, and Central Valley growing regions was: Napa County 2.4 tons; Sonoma County 2.8 tons; Monterey and San Benito County 4.4 tons; southern San Joaquin Valley 15.1 tons.
19. Priewe 2005, 36.
20. Robinson 2006, 134–35.
21. Kramer 2004, 78.
22. Kramer 2004, 60–61.
23. Anecdotal evidence suggests that many growers of high-quality grapes use this practice. As an example, Hudson Vineyards, a 180-acre commercial vineyard in the Carneros region of California, regularly employs cluster thinning for Syrah grapes, and in a typical year, half of the grapes are thinned and allowed to rot on the ground. Harris 2010.
24. Robinson 2006, 211.
25. See Goode 2005, 68–77, for an interesting and informative discussion of biodynamic grape growing.
26. Penn 2010.
27. Consumers may perceive that it is difficult to make a good sulfite-free organic wine. The wine literature tends to support the view that making a good wine without adding sulfites is very challenging (which is why almost all winemakers do add sulfites). Even if it can be done, to prevent the wine from deteriorating, it must be transported and stored in a temperature-controlled environment, which is difficult given the current wine distribution system.
28. A grower may consider a red grape to be mature if it looks somewhat dehydrated, stains the fingers, and easily detaches from the stem. The seeds are brown, hard, and crunchy, rather than green and soft, and the berry smells and tastes fruity, not herbaceous.
29. Goode 2005, 109.
30. Stevenson 2005b, 250.
31. Robinson 2006, 432–33.
32. Halliday and Johnson 2007, 68.
33. Goode 2005, 35–39.
34. Greenspan 2009 reports a survey of 350 vineyards—50 percent of them in California and less than 3 percent in Canada—that provides estimates of the adoption of capital-intensive methods of production and usage of advanced technology by grape growers. Twenty-three percent of growers use mechanical harvesting, 10 percent mechanical leaf removers, and only 6 percent machine pruners. Relatively few growers use machines for cluster thinning. Capital-intensive methods of production are used most by vineyards that are 200 acres or bigger and least by small vineyards that farm 25 acres or less. Eighty percent of large vineyards machine-harvest grapes, and 20 percent use mechanical pruning. Only 6 percent of small vineyards harvest by machine, and less than 5 percent use mechanized pruning. About 40 percent of vineyards use some type of weather-collection technology, while only 15 percent employ geographical information systems to construct maps of soil and landscape variation within the vineyard. Once again, larger vineyards are much more likely to make use of more advanced vineyard technologies than smaller vineyards.
CHAPTER 5: GRAPE MARKETS AND SUPPLY CYCLES
1. This section draws heavily from Heien 2006.
2. In this chapter, the word winery is used to designate a wine firm.
3. Goodhue et al. 2002.
4. For example, the 180-acre Hudson Vineyards in the Napa Valley sells grapes to thirty-four different wine firms grown on fifty-four different vineyard blocks. Harris 2010.
5. Goodhue et al. 2002.
6. Lukacs 2005, 36.
7. Penn 2002.
8. These data on grape output are from the Wine Institute, www.wineinstitute.org.
9. See www.turrentinebrokerage.com/wine-business-wheel.
10. The classic paper on the cobweb theory is Ezekiel 1938. For applications of the theory to hogs and lemons respectively, see Harlow 1960 and French and Bressler 1962.
11. If the demand curve is steeper than the supply curve, then periods of overproduction and underproduction become successively larger over time and the market will move away from equilibrium point e. In this case, grape production and prices would fluctuate wildly over time. This type of unstable equilibrium seems to be inconsistent with the actual behavior of the grape market in the United States.
12. The bulk wine market is described in detail in chapter 7.
CHAPTER 6: WINE PRODUCTION
1. A production function is often expressed in general functional form as Q = f (I1, I2, . . ., In), where Q is maximum output produced and I1, I2, . . ., In are the quantities of n inputs used. For a wine firm, Q is maximum wine output, I1 may be grapes, I2 the services of cellar workers, etc. The functional form f represents the current state of wine-production technology. Different functional forms describe different technologies. For example, many economists believe that the multiplicative functional form Q = β0I1β1I2β2I3β3 . . ., called a Cobb-Douglas production function, is a reasonable approximation of technology for some firms and industries. An empirical study of a production function would gather data on output and inputs for firms in an industry, estimate the parameters of the production function β0, β1, β2, . . ., and use these estimates to obtain various measures such as input productivity and returns to scale. From a theoretical perspective, the neoclassical theory of the firm views the firm as a “profit-maximizing, production function.”
2. For detailed discussion and categorization of the variety of wine styles, see Ewing-Mulligan and McCarthy 2005.
3. McCoy 2005, 265–67.
4. The discussion of the stages of the wine-production process that follows draws largely from Bird 2005, Goode 2005, Halliday and Johnson 2007, Kolpan et al. 2002, Lewin 2010, MacNeil 2001, Priewe 2005, Robinson 2006, Stevenson 2005a, and Thach and Matz 2004.
5. Lewin 2010, 92.
6. Some very small specialty producers in the United States still crush grapes with their feet.
7. Producers have a range of mechanical presses from which to choose, among them the old-fashioned basket press, horizontal screw press, continuous screw press, pneumatic press, and tank press. They vary widely in price from the relatively inexpensive basket press to the very expensive tank press. Different presses can produce juices of different quality. The tank press is believed to produce the highest-quality juice. Many large volume producers prefer the continuous screw press, because it is the most efficient way to press large amounts of grapes, but it is generally believed to produce low-quality juice. Bird 2005, 45–53.
8. Sulfur dioxide can also enhance the extraction of aroma and pigment compounds from red grape skins during cold maceration.
9. Bird 2005, 57–58.
10. Use of reverse-osmosis filtering machines to concentrate must has become a common practice in Bordeaux, France, where many top châteaux have invested in their own equipment. Goode 2005, 113–14.
11. Stevenson 2005, 26.
12. Bird 2005, 81–88.
13. MacNeil 2001, 40.
14. Lewin 2010, 132; Robinson 2006, 491.
15. Micro-oxygenation also improves red wine by eliminating vegetal flavors, and all the large wineries in the Central Valley and as many as 33 percent of North Coast wineries in California are believed to use it, as are 66 percent of Chilean wineries and 5 percent of wineries in Australia and France. Goode 2005, 98.
16. Fining is also used by some winemakers to reduce the amount of tannin in some red wine to give it a softer mouthfeel and making it more appealing to consume at an early age.
17. Bird 2005, 132–34.
18. Lewin 2010, 104.
19. If a wine is labeled as a blend of different grape varieties, the order in which the grapes are listed typically indicates their relative proportions from largest to smallest. For example, a wine labeled Grenache Syrah Mourvedre contains more Grenache than Syrah, and more Syrah than Mourvedre.
20. Lukacs 2000, 197–99.
21. White wines are typically bottled in spring and red wines in summer.
22. Lavin 2008.
23. Pregler 2005.
24. Lewin 2010, 218.
25. Goode 2005, 148.
26. Aeppel 2010.
27. Fish 2010.
28. Pregler 2006.
29. Federal regulations require only a 75 percent grape content for a non-AVA geographic location specified on the label (e.g., Napa County).
30. For a non-AVA wine, the requirement is only 85 percent.
31. Gaiter and Brecher 2007.
CHAPTER 7: BULK WINE, PRIVATE-LABEL WINE, AND WINE ALCOHOL
1. Estimates suggest that a standard cargo ship container holds about 13,000 bottles of wine, while a bulk container of the same size holds the equivalent of 32,000 bottles. This reduces transportation cost by as much as 40 percent.
2. Pinney 2005, 88–94.
3. Ibid.,130–38.
4. Cline 2007.
5. A number of smaller specialized brokers also operate in California and other regional markets in the United States.
6. The Bronco Wine Company owns more than 30,000 acres of vineyard land and has the capacity to store more than 100 million gallons of wine. “Review of the Industry: The WBM 30—Profiles,” Wine Business Monthly, February 2011.
7. Ibid.
8. Anderson and Nelgen 2011, tables 41, 43, 46.
9. Quackenbush 2010.
10. “News: U.S. Bulk Wine Imports Tripling as Global Producers Seek Low Cost Supplies,” Wine Business Monthly, October 2009.
11. Négociant is French for merchant. The wine firm that sells bulk wine to a negociant may also bottle it. Negociants may also purchase shiners and resell them under their own brand names.
12. “Review of the Industry: The WBM 30—Profiles,” Wine Business Monthly, February 2012.
13. See www.steveheimoff.com/?s=cameron+hughes.
14. See http://nomadeditions.com
15. Robinson 2006, 115–16.
16. Brostrom and Brostrom 2009, 159–60.
17. Tinney 2006.
18. Ibid.
19. “Interview with Doug Bell, global wine buyer for Whole Foods.” http://www.rjswineblog.com/2009_09_01_archive.html.
20. Taber 2011, 116.
21. Tinney 2006.
22. Veseth 2011, 61.
23. Ibid., 60–64.
24. For discussion of these technologies, see Goode 2005, 109–14.
25. Goode 2005, 112; Alston et al. 2011b, n. 9.
26. The researchers obtained the data from the Liquor Control Board of Ontario, Canada. It measures the actual alcohol content of each wine sold in Ontario. Recall that the actual alcohol content can differ from the content indicated on the wine label.
27. New World countries are Argentina, Australia, Canada, Chile, New Zealand, South Africa, and the United States. Old World countries are France, Italy, Spain, and Portugal.
28. From a study reported by Beekman Wines & Liquors of Glen Rock, New Jersey; see www.beekmanwine.com/prevtopbh.htm.
29. Consumers perhaps derive utility from the perceived positive health effects of consuming wine in moderation, judged, say, to be two glasses of wine containing 14 percent or less alcohol per day with dinner. Wine with a higher alcohol content is viewed as higher than moderate consumption. Recall that under federal wine-label regulations, 14 percent alcohol is the line of demarcation between a table wine and a high-alcohol dessert wine. An increasing number of sommeliers and wine merchants are refusing to purchase wine products with an alcohol content that exceeds 14 percent for a different reason: they believe these wines are not food-friendly. Teague 2010a.
30. Recall that a rational individual will acquire additional information as long as the marginal benefit exceeds the marginal cost.
CHAPTER 8: WINE DISTRIBUTION AND GOVERNMENT REGULATION
1. Cholette 2007.
2. Thach and Matz 2004, 105–6.
3. Fisher 2009.
4. Hilton 2008.
5. For an excellent discussion of alcoholic beverage and wine regulations and laws from a historical perspective, see Mendelson 2009.
6. Beliveau and Rouse 2010.
7. Riekhof and Sykuta 2005.
8. Information on state shipping laws is provided by the Wine Institute, www.wineinstitute.org, and eCompli Beverage Compliance Online, www.compli-beverage.com.
9. Mendelson 2009, 97.
10. Perdue 1999, 80.
11. A report by the Specialty Wine Retailers Association states there may be as few as 200 wine distributors in the United States; the two largest distributors in Texas account for 95 percent of the wine market. Specialty Wine Retailers Association 2008.
12. Evidence from a large body of studies suggests that one daily alcoholic beverage for women and two for men reduces the risk of heart disease, ischemic stroke, and possibly diabetes by increasing good cholesterol, stabilizing blood sugar, thinning blood, and acting as an anti-inflammatory. Some studies suggest that moderate consumption of red wine may have additional benefits such as reducing the risk of cataracts, ulcers, dental cavities, and some pulmonary conditions; see Baxter, 2009. Simon 2002, 207, provides estimates suggesting that total abstinence from alcohol consumption would reduce annual deaths from alcohol-related diseases by 100,000, but increase deaths from heart disease by 80,000.
13. As of December 2011, New York, Connecticut, Tennessee, Mississippi, Kentucky, and Wyoming allowed grocery stores to sell beer but not wine. Rickard et al. 2011.
14. In 1996, the Supreme Court struck down a Rhode Island law prohibiting advertising of alcoholic beverages. The state argued that this law increased social welfare by increasing alcohol prices and reducing excessive drinking. The Supreme Court suggested that raising alcohol taxes might be a more effective way to increase prices and decrease overconsumption. Mendelson 2009, 180.
15. Beliveau and Rouse 2010.
16. Mendelson 200, 183.
17. Perdue 1999, 77.
18. Beliveau and Rouse 2010.
19. Riekhof and Sykuta 2005.
20. Mendelson 2009, 184.
21. Wine Institute, www.wineinstitute.org.
22. Mendelson 2009, 189.
23. The principles of the economic theory of regulation were first propounded by Stigler 1971. Stigler’s ideas were then formalized by Peltzman 1976 and extended by Becker 1983.
24. The per member net benefit for an interest group is the difference between the benefit per member from a regulation and the cost per member of acquiring information about the regulation and organizing the interest group to deliver political support.
25. Riekhof and Sykuta 2005.
26. Specialty Wine Retailers Association 2008.
27. Braun 2009.
CHAPTER 9: THE WINE FIRM
1. For different views of the firm, see Coase 1937, Alchian and Demsetz 1972, and Tirole 1989, chap. 1.
2. See www.ttb.gov.
3. If a firm contracts with a custom-crush producer for wine bottled under its own brand name, the label will indicate that the wine was “Produced and bottled by” the custom-crush winery, not the firm that sells the wine brand. If the firm contracts with the custom producer for bulk wine, and blends or bottles the wine in its own facility, the label will state “Cellared by” the firm selling the wine brand, not the custom producer.
4. When a wine firm registers as a legal entity, it must choose a name (e.g., XYZ Wine Company). However, it is allowed to list one or more other names as trade names and can conduct business under any of these trade names (e.g., XYZ Winery, ABC Vineyards, and LMN Vintner). When a wine firm obtains a basic alcohol permit from the TTB, it must provide a unique “operating trade name (e.g., XYZ Winery). It must also add to the permit any “bottling trade name” that it puts on a wine label (e.g., ABC Vineyards). The TTB requires that a bottling trade name appear on the label after the words “bottled by.” If a brand name does not appear on the label, the bottling trade name is considered to be the brand name. In this example, XYZ Wine Company has a basic alcohol permit under the operating trade name XYZ Winery, and sells a wine whose label states “bottled by ABC Vineyards.” ABC Vineyards is the brand name if no other brand name is printed on the bottle. For a more detailed discussion, see Schorske and Heckathorn 2004.
5. Information on the wine firms discussed in this section comes from a variety of sources, including Stockton 2010, Lindblom 2010, Quackenbush 2009, Laube 2009, Heron 2010, Lewin 2010, wine firms’ websites, Hoover’s company profiles available on the Internet, and Wine Business Monthly, February 2010, February 2011, February 2012.
6. See “Interview with Doug Bell, global wine buyer for Whole Foods.” http://www.rjswineblog.com/2009_09_01_archive.html.
7. This estimate is from the Wine Institute, www.wineinstitute.org.
8. Wine Business Monthly does not use the term organization in its definition; however, the notion of an organization is implied. For a verbatim definition of bonded and virtual wineries, see Wine Business Monthly, February 2012.
9. Ibid.
10. Anderson and Nelgen 2011, table 33.
11. Wine Business Monthly, February 2012.
12. Pregler 2010.
13. An alternative type of partnership that is more involved and requires formal documentation is a limited partnership. This arrangement has at least one general and one limited partner, but can have more than one of each. Limited partners differ from general partners in that they have limited liability, so that their personal assets are not at risk, and they do not participate in the management of the firm.
14. A distinction is made between a public and private corporation. A public corporation has a large number of owners and its stock is traded widely on a national exchange or over-the-counter market. A private corporation has a relatively small number of owners, typically twenty-five or fewer, and is not traded on a national market. The owners of a private corporation can be a single individual, family, group of investors, or another private or public corporation.
15. The profit of a proprietorship and partnership is taxed once as ordinary income of the proprietor or partners. The profit of a corporation is taxed twice: once as corporate profits and then a second time as the owner’s dividend income.
16. This estimate is the result of an extensive search of information available about wine firms on the Internet.
17. The list of the thirty largest domestic wine companies in the United States is taken from Wine Business Monthly, February 2012.
18. Lewin 2010, 229.
19. Large U.S. wine firms have a number of brands and wineries. For example, Constellation sells more than seventy wine brands and owns nineteen wineries in the United States, as well as wineries in Canada and New Zealand. Its portfolio includes such well-known wineries as Robert Mondavi, Franciscan, Simi, Clos du Bois, and Hogue. Treasury Wine Estates’ portfolio includes Beringer, Stag’s Leap, Chateau St. Jean, Etude, Penfolds, and Lindemans.
20. Goodhue et al. 2002.
21. For a contract to be legally enforceable it must satisfy the criterion of consideration. Consideration means that there is evidence that the wine firm and the other party have considered the terms of the transaction agreement and accepted them. A legal contract does not exist if either the wine firm or the other party does not understand or agree to the terms of the exchange, or the terms are unduly vague, in which case the courts have no basis for enforcing the agreement. A court may have to decide whether a legal contract exists, and, if so, what its specific terms are. See Posner 1977, chapter 4.
22. Ibid.
23. Milgrom and Roberts 1992, 127–40.
24. Williamson 1985, 47.
25. Stevenson 2006, 250.
26. In general, a moral hazard exists when a decision maker does not bear the full cost of his actions, and therefore makes choices that increase his own welfare but reduce the welfare of others in society. In this example, the grower does not bear the full cost of his decision to shirk, which reduces the welfare of the wine firm.
27. Price and viticultural provisions may also be included in a grape contract for reasons unrelated to information asymmetry such as risk sharing. For instance, if a wine firm is risk averse, it may want to tie the price of grapes to the price of wine to share the risk of uncertain wine market conditions with the grower. A wine firm that can observe quality and grower effort may desire to include provisions for viticultural practices to obtain greater consistency from one year to the next.
28. Billikopf and Norton 1992. A wine firm also has an informational disadvantage when it contracts with a distributor to transport, store, and sell wine to retailers. The wine firm wants the distributor to ensure wine quality, put forth maximum effort to sell the wine, determine the best price, and provide information on which wine products are selling and where. However, the wine firm cannot perfectly observe the transportation, storage, and sales effort of the distributor. This lack of information creates a moral hazard, and the distributor may therefore attempt to benefit at the expense of the wine firm by skimping on the services agreed to in the contract and pricing the wine to its own advantage.
29. This line of reasoning implies that the primary objective of a large public corporation should be to make as much money as it can for the owners. However managers, like consumers, seek to maximize utility. What if managers derive utility from some aspect of running the firm, such as the prestige of controlling a gigantic but inefficient firm, or perquisites like posh offices, private planes, and inflated salaries? What is to prevent managers from making decisions that trade profits for these sources of personal utility? Incentives exist for managers of public corporations that may be sufficient to induce them to make maximizing profit their top priority and minimize the extent to which they pursue nonprofit objectives. First, many public corporations tie managers’ salaries to the firm’s profits. Second, if managers don’t make profit-maximizing decisions, the board of directors, acting on behalf of the stockholders, may replace them. Finally, if managers fail to make profit-maximizing decisions and the board of directors fails to take action, the firm may be acquired by another firm that sees an opportunity to make money by replacing both the existing management and the board of directors with new decision makers who pursue maximum profit.
30. See, e.g., Conaway 2003.
31. Scott Morton and Podolny 2002.
32. For example, suppose the proprietor of a wine firm owns a vineyard and uses his own time to manage the firm. Assume he could rent the land for $20,000 per year and work as a winemaker for another winery at an annual salary of $80,000. His normal profit is $100,000 per year; this is the amount of money he could make if he used his land and time resources in their next best area of employment. If his accounting profit for the year is $125,000, he has an economic profit of $25,000, and he is earning $25,000 more than he could by using his land and time in their best alternative lines of employment. If his accounting profit for the year is $75,000, his economic profit is negative $25,000, and he could make $25,000 more by devoting his resources to their next best uses. Finally, if his accounting profit is $100,000, he earns zero economic profit. In this case, he makes the same amount of money using his resources in the wine firm or in their next best areas of employment.
33. A method of production is a particular combination of labor services, capital equipment, and other inputs that can be used to produce a specific amount of output of a good such as grapes and wine, or a service such as transportation and storage.
34. Anderson and Nelgen 2011, table 43.
35. Folwell et al. 2001. These authors’ estimates are in 1998 dollars. I have adjusted them for inflation and report year 2010 dollar estimates. Folwell et al. assume that the wine firm produces premium table wine without a vineyard operation. The investment for a winery that produces a commodity wine may be somewhat smaller.
36. Gallo, The Wine Group, and Trinchero Family Estates also produce and sell spirits. I do not include these as conglomerates, since a relatively small proportion of their revenues come from these non-wine products.
37. Brown-Foreman was the tenth-largest wine firm in the United States in 2009, with annual sales of 4.5 million cases. In 2011, it sold all but one of its wine brands, including Fetzer Vineyards, to the Chilean wine firm Concha y Toro. At present, Brown-Foreman sells only one still wine brand, Sonoma-Cutrer.
CHAPTER 10: WINE-FIRM BEHAVIOR
1. The discussion of wine-firm behavior in this chapter includes concepts from neoclassical economics, transaction-cost economics, and firm-capabilities theories.
2. Akerlof 1970.
3. Arnold 2007.
4. McCoy 2005, 225–27.
5. See “Constellation Simply Naked Wine Brand Off to Fast Start, Selling 180,000 Cases in First Half Year,” Shanken News Daily, April 30, 2012; and see also ibid., April 5 2012, “Constellation Sales Slip in Fiscal Year, Raft of New Products Coming.” www.shankennewsdaily.com.
6. Williamson 1979, 1985.
7. Goodhue et al. 2004.
8. See https://wikis.nyu.edu/xdesign/mediawiki/index.php/Wine_Bottle.
9. Folwell et al. 2001. A premium wine is defined as wine sold at no less than $6.70 per 750 ml bottle (in 2010 dollars). The authors assume that the winery produces four or more different varietal wines. The average cost per case is for a “mixed case.” Estimates are for five wineries of different sizes, with annual case production of 2,000, 5,000, 10,000, 50,000, and 500,000 respectively. Because average cost declined over the entire range of the study output, minimum efficient scale was not determined.
10. Ibid. The authors’ estimates are in 1998 dollars. I have adjusted these estimates for inflation and report them in 2010 dollars.
11. Intardonato 2010.
12. Thach and Matz 2004, 42–44; Penn 2002.
13. Cook 2007.
14. For discussion of firm-capabilities theory applied to the sourcing decision, see Parmigiani 2007.
15. An often used example of tacit knowledge is riding a bicycle.
16. The estimates used for this example are taken from Folwell et al. 2001, rounded off, adjusted for inflation, and given in 2010 dollars. The variable cost of producing wine is inflated for Firm B to reflect its lower productivity in producing wine.
17. The information for this story is from http://teatown.com.
18. The information for this story is from Teague 2010b and the Cameron Hughes Wine website, www.chwine.com.
19. The information for this story is from Conaway 2003, 85, and Robert Parker’s website, www.erobertparker.com.
20. Claburn 2004.
21. Brostrom and Brostrom 2009, 100.
CHAPTER 11: THE WINE CONSUMER AND DEMAND
1. The data for the number of wine drinkers and total wine consumption come from www.winemarketcouncil.com/?page_id=35 and are for 2012. The estimate of the number of bottles consumed per year and the number of glasses consumed per week were calculated using this data.
2. The information and data sources for this section come from the Wine Market Council, www.winemarketcouncil.com, and wine market council data reported in Nichols 2011; Gallup and Stonebridge Research data reported in Insel 2009; and Constellation Brands’ Project Genome data reported in Tinney 2008a.
3. Wine Institute, www.wineinstitute.org.
4. These market shares are calculated using Nielson Company data reported in Wine Business Monthly, May 2012.
5. For a formal analysis of consumer snob behavior and conspicuous consumption, see Leibenstein 1950.
6. See Fogarty 2008 for a summary of the price-elasticity estimates.
7. If demand is unit-elastic, the dollar value of wine sales remains the same regardless of whether price rises or falls.
8. For linear and most types of nonlinear demand curves, elasticity varies over different price ranges. Specifically, as price rises, elasticity increases in magnitude.
9. Income elasticity of demand is defined as the ratio of the percentage change in the quantity of wine demanded to the percentage change in income. Demand for wine is income-elastic (inelastic) and consumers’ buying decisions are relatively responsive (unresponsive) to a change in income if the absolute value of this elasticity measure is greater (less) than one. A positive algebraic sign indicates that wine is a normal good; a negative sign informs us that wine is an inferior product.
10. See Fogarty 2008 for a summary of the income-elasticity estimates.
11. They report a negative income-elasticity estimate for Merlot, but the p-value indicates a high probability that this is the result of chance.
12. Perdue 1999, 25.
13. Cross-price elasticity is defined as the ratio of the percentage change in the quantity demanded of a good to the percentage change in the price of a related good. If the algebraic sign of cross-price elasticity is positive, then the good is a substitute; a negative algebraic sign indicates that the good is a complement. If cross-price elasticity is zero, then the good is unrelated in consumption. The larger the magnitude of cross-price elasticity, the more closely the good is related.
14. The California wine groups also included wines produced in the state of Washington.
15. Perdue 1999, 21–23.
16. Cuellar et al. 2009.
17. Perdue 1999, 17.
18. Studies include Heien and Pompelli 1989, Gao et al. 1995, Nayga 1996, Blaylock and Blisard 1993, and Hussain et al. 2006.
CHAPTER 12: THE WINE CONSUMER, QUALITY, AND PRICE
1. This is consistent with the version of hedonic price theory developed by Rosen 1974 and Nerlove 1995.
2. An implicit price is also called a hedonic price.
3. Tinney 2008a.
4. Soklin and Bruce 2008, 23.
5. For a good description of the wine auction market, see Soklin and Bruce 2008.
6. See, e.g., Prial 2000.
7. Weil 2001.
8. Thach 2008.
9. See chapter 11 for an explanation of p-value.
10. This equation is linear in parameters, and therefore allows for a variety of functional forms such as linear in variables, log-linear, and quadratic forms. An intercept term is often included in the equation.
11. Lattey et al. 2007.
12. Rosen 1974.
13. Combris et al. 1997, Combris et al. 2000, Cardebat and Figuet 2004, and Lecocq and Visser 2006.
14. Kramer 2003, 108.
15. Reuter 2009.
16. All but one of these studies assume no interaction effects between wine score and wine type; that is, the effect of a one-point increase in score on price does not depend upon grape variety or blend. For example, a one-point increase in score for a Cabernet Sauvignon will have the same effect on price as a one-point increase in Merlot or Chardonnay.
17. This is the average elasticity estimate for three separate periods reported by Schamel.
18. For more detailed descriptions of the Bordeaux futures market, see Soklin and Bruce 2008, and McCoy 2005.
19. Schamel 2009.
20. Bombrun and Sumner 2003.
21. Schamel 2009.
22. Landon and Smith 1998.
23. Davis and Ahmadi-Esfahani 2006.
24. San Martin et al. 2008.
25. Lewin 2010, 73.
26. Ayres 2007, 1–6.
27. Zraly 2008, 297.
CHAPTER 13: THE GLOBALIZATION OF WINE
1. Anderson and Nelgen 2011.
2. Lewin 2010, 201.
3. Drinks International 2011.
4. Bostrom and Bostrom 2009, 273.
5. Veseth 2011, 139.
6. Taber 2011, 138; Veseth 2011, 140.
7. Anderson and Nelgen 2011, table 55.
8. For an interesting discussion of the impact of government policy on wine globalization, see Veseth 2011, chapter 4.
9. Anderson and Nelgen 2011, table 16.
10. Ibid., table 41.
11. The data for this estimate were obtained from the Wine Institute, www.wineinstitute.org, and it includes territories such as the Virgin Islands.
12. For a good discussion of the development of the Chinese wine industry, see Taber 2011, chapter 9.
13. Anderson and Nelgen 2011, table 151.
14. Veseth 2011, chapter 5.
15. Taber 2011, 145.
16. Anderson and Nelgen 2011, tables 118 and 121.
17. Lukacs 2000, chapter 9, provides an interesting historical account of foreign investment in the U.S. wine industry.
18. Coleman 2008, 107.
19. Anderson and Nelgen 2011, table 120.
20. Export data for 2011 were obtained from the Wine Institute, www.wineinstitute.org.
21. Esterl 2012; Anderson and Nelgen 2011.
22. Wine cooperatives existed in the United States until 2002. Between 1934 and 1975, forty-four cooperatives were created; in the 1940s, those located in California produced one-third of the state’s wine. By 1980, only eight cooperatives remained, and the last one exited the wine industry in 2002. Pinney 2005, 394n68.
23. The estimate for Germany is from Hanf and Schweickert 2007; for France, Saïsset et al. 2011; for Italy, Malorgio et al. 2008; and for Spain, Martínez-Carrión and Medina-Albaladejo 2010.
24. Anderson and Nelgen 2011, tables 34 and 35.
25. See www.wineeconomist.com/2011/08/02/invisible-wineries-europes-controversial-cooperatives.
26. Most wine cooperatives were created by small grape growers whose objective was to get a higher price for their grapes by collectively processing them into wine themselves rather than selling them to wineries or merchants.
27. Hanf and Schweickert 2007.
28. Couderc and Marchini 2011.
29. Lewin 2010, 221.
30. Veseth 2011, 173–74.
31. Anderson and Nelgen 2011, table 35.
32. Lewin 2010, 229.
33. The Canandaigua Wine Company changed its name to Constellation Brands in 2000.
34. A group of wine industry veterans established Ascentia by borrowing more than $200 million to purchase the portfolio of eight brands and wineries from Constellation, which included Geyser Peak, Atlas Peak, XYZ Zin, Gary Farrell, Buena Vista, Columbia Winery, Covey Run, and Ste. Chapelle. In 2008, Ascentia was the thirteenth-largest wine firm in the United States with annual sales of 2 million cases. However, it had difficulty paying its debt and proceeded to sell off its brands to Gallo, Accolade, and several other wine firms. It eventually went out of business in 2012. Accolade’s purchase of Geyser Peak in 2012 allowed it to expand its operations to the United States.
35. Wine Business Monthly, February 2012.
36. Foster’s acquisition of Beringer was a mutually agreeable merger between two publicly traded corporations, not a hostile takeover. Beringer was merged with Mildara Blass to create Beringer-Blass Wine Estates, a subsidiary of Foster’s. Gilinsky et al. 2004.
37. Wine Business Monthly, February 2012.
38. In 2009, Constellation was the third-largest wine firm in the United States, and Fosters was the second-largest in Australia. Anderson and Nelgen 2011, table 34.
39. Ibid.
40. Bussewitz 2012.
41. Lewin 2010, 226.
42. Taber 2011, 25.