The Cost of Ignorance: Reputational Mark-up in the Market for Tuscan Red Wines

TY - UNPB

T1 - The Cost of Ignorance

T2 - Reputational Mark-up in the Market for Tuscan Red Wines

AU - Persson, Karl Gunnar

AU - Sharp, Paul Richard

N1 - JEL Classification: L15, L66

PY - 2007

Y1 - 2007

N2 - This paper argues that imperfectly informed consumers use simple signals to identify the characteristics of wine. The geographical denomination and vintage of a wine as well as the characteristics of a particular wine will be considered here. However, the specific characteristics of a wine are difficult to ascertain ex ante given the enormous product variety. The reputation of a denomination will thus be an important guide for consumers when assessing individual wines. Denomination reputation is a function of average quality as revealed by the past performance of producers. The impact of past performance increases over time, since producers consider improved average quality to be an important factor in enhancing the price, but this necessitates monitoring of members in the denomination. The market and pricing of Tuscan red wines provide a natural experiment because there are a number of denominations of different age, each of which is typically undergoing a process of gradual increase in quality standards over time. Furthermore, Tuscan red wines are easily comparable because of great similarities in climate and choice of grape varieties, soil and exposure to sun etc. We show that new denominations have a lower average quality score and that price differentials between denominations are linked to differences in average quality, although consumers tend to exaggerate the quality gap between prestige denominations and new denominations. Thus, a producer in an old denomination benefits from a substantial mark-up relative to an equally good producer from a new denomination. Since ambitious producers in new denominations suffer from price ‘discrimination' it can be expected that they will produce vineyard branded but denomination neutral wines, provided they can overcome the large fixed costs associated with that strategy. We show that denomination neutral wines do indeed have a stronger price-quality relationship than denomination specific wines

AB - This paper argues that imperfectly informed consumers use simple signals to identify the characteristics of wine. The geographical denomination and vintage of a wine as well as the characteristics of a particular wine will be considered here. However, the specific characteristics of a wine are difficult to ascertain ex ante given the enormous product variety. The reputation of a denomination will thus be an important guide for consumers when assessing individual wines. Denomination reputation is a function of average quality as revealed by the past performance of producers. The impact of past performance increases over time, since producers consider improved average quality to be an important factor in enhancing the price, but this necessitates monitoring of members in the denomination. The market and pricing of Tuscan red wines provide a natural experiment because there are a number of denominations of different age, each of which is typically undergoing a process of gradual increase in quality standards over time. Furthermore, Tuscan red wines are easily comparable because of great similarities in climate and choice of grape varieties, soil and exposure to sun etc. We show that new denominations have a lower average quality score and that price differentials between denominations are linked to differences in average quality, although consumers tend to exaggerate the quality gap between prestige denominations and new denominations. Thus, a producer in an old denomination benefits from a substantial mark-up relative to an equally good producer from a new denomination. Since ambitious producers in new denominations suffer from price ‘discrimination' it can be expected that they will produce vineyard branded but denomination neutral wines, provided they can overcome the large fixed costs associated with that strategy. We show that denomination neutral wines do indeed have a stronger price-quality relationship than denomination specific wines

KW - Faculty of Social Sciences

KW - wine

KW - price-quality relationship

KW - Tuscany

M3 - Working paper

BT - The Cost of Ignorance

PB - Department of Economics, University of Copenhagen

ER -