Product attributes, consumer demand, and welfare effects: Evidence from the U.S. wine market
Date
2022-05
Authors
Chandra, Raj
Major Professor
Advisor
Moschini, GianCarlo
Lade, Gabriel E.
Kedagni, Desire
Kim, Donghyuk
Harris Lagoudakis, Katherine
Committee Member
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Abstract
Agriculture and food producers face the perennial challenge of differentiating their products based on quality without falling victim to the market failure problems due to asymmetric information. Firms have long faced the thorny issue of supplying quality attributes in such situations, and several market mechanisms have emerged to deal with it. Chief among them are market-based solutions that rely on reputation through firms’ strong brand identities that can foster repeat purchases. Wine is a classic example of an experience good where consumers cannot ascertain the quality of the product before consumption, which potentially leads to an asymmetric information problem in the wine market. A systematic component of wine quality is believed to depend on the geo-climatic factors of its production conditions. Thus, the wine industry has also developed a somewhat unique system of geographic origin labeling. However, geographic origin labeling has been believed to play a more important role in Old World than in the New World wine industry. It was only in the 1980s when the United States developed its own federally recognized appellation of origin designations for its prestigious wine-growing regions known as American Viticulture Areas (AVAs).
This dissertation attempts to quantify the role of product attributes in shaping consumer demand in a highly differentiated market — wine. It also measures the welfare generated from product attribute information, emphasizing the impact of AVA classification in the United States wine industry. The study uses the Nielsen Consumer Panel dataset, a nationally representative and extensive dataset available on wine purchases for the United States market. Chapters 1 and 2 provide the general introduction to the dissertation, the background, and recent trends in the United States wine industry.
Chapter 3 analyzes the determinants of retail wine prices in the US market to characterize the main dimensions of product differentiation. The study also proposes using a metric based on the Shapely value from cooperative game theory to represent the overall importance of the set of determinants of wine price. Empirical findings suggest that, after accounting for firms’ brands, wine type, varietals, and the other control variables, information about the geographic origin of US wines carries considerable explanatory power. Furthermore, using the metric based on Shapely Value, the study finds that more than 67 percent of US retail wine prices are accounted for by individual wines own brands, a finding consistent with the basic economics of markets for experience good and the role of reputations. The study also finds that geographic origin is the next most important predictor of wine prices, and its contribution is about twice as significant as that of varietals.
Chapter 4 of this dissertation takes a more structural approach and develops and estimates a novel wine demand model of the discrete choice framework for the United States market. The modeling approach adopts a two-level nested logit model. The estimated parameters conform broadly with expectations. Elasticity estimates indicate that product-specific own-price elasticities are large, as expected, given the very disaggregated formulation of the product space. As for geographical indications, we find an economically and statistically significant impact of AVAs on wine demand. Consumers’ willingness to pay for wine products’ geographic origin over the other quality indicators such as the wine brand and varietals appears sizeable. AVAs command heterogeneous values in the eyes of the consumers relative to the base (relative to a generic US label), ranging from $1 to $13 per bottle. The study also finds significant welfare gains from AVA information on wine labels. Over the period of interest, the welfare gain attributable to AVAs is estimated at about $2.4 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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Economics
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article