Geographical Indications and Welfare: Evidence from the US Wine Market
Date
2021-12
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© 2021 The Authors
Abstract
A systematic component of wine quality is believed to depend on the geo-climatic factors of its production conditions. This belief has long been a motivation for the development of geographical indications for wines. In the United States, American Viticulture Areas (AVAs) represent the most common geographic factor firms use to differentiate their products. In this paper, we estimate a discrete choice model of US wine demand to study the market and welfare impact of AVAs. Specifically, we develop a two-level nested logit choice model, featuring many wine products and characteristics—including wine type, brands, and varietals, in addition to AVAs—and estimate it using Nielsen Consumer Panel data over the 2007–2019 period. We find significant welfare gains from AVA information on wine labels. Over the period of interest, the welfare gain attributable to AVAs is estimated at about $2.37 billion, with wine producers and retailers capturing approximately 80% of this surplus. Approximately 90% of consumer welfare gains are due to product differentiation and increased variety, with the remaining gains due to price decreases resulting from increased product competition.
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Geographical indications and welfare: Evidence from US wine demand
(Wiley Periodicals LLC on behalf of Agricultural & Applied Economics Association,
2024-10-03)
A systematic component of wine quality is believed to depend on the geoclimatic factors of its production conditions. This belief has long motivated the development of geographical indications for wines. American viticulture areas (AVAs) represent the most common geographic identifier firms use to differentiate their products in the United States. In this paper we contribute new empirical evidence on the effectiveness and impact of GIs by studying consumers' valuation of US wine appellations within a structural model of wine demand. The model is rooted in the discrete-choice framework, under the basic premise that observable information concerning wine attributes is credible and key to consumers' choices. Specifically, we develop a two-level, nested-logit model featuring many wine products and characteristics—including wine type, brands, and varietals, in addition to geographic origin. The model is estimated using NielsenIQ Consumer Panel data over the 2007–2019 period. We find that US consumers place a relatively high value on wines' geographic origins, distinct from the value of brand and varietal information, as documented by their marginal willingness to pay estimates. Furthermore, a counterfactual experiment shows significant welfare impacts from information about the geographic origin of wines. Over the period of interest, the welfare gain attributable to US geographic origin designation is estimated at about $5.37 billion, with wine producers and retailers capturing ~78% of this surplus. Virtually all consumer welfare gains are due to product differentiation and increased product variety enabled by information about the wine's origin.
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21-WP 628
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Working Paper
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JEL Codes: D82, O34, Q11, Q18