XXIV EuAWE 2017
1
Bologna Conference
The price of wine as consumer good or investment plan:
a survey of existing and missing hypotheses
Eric LEFUR, Jean-François OUTREVILLE
INSEEC Business School, Bordeaux, France,
School of Wine and Spirits Business, Burgundy School of Business, Dijon, France
[email protected], [email protected]
The demand for wine could be considered within the context of the
consumer’s lifetime allocation process. Within this framework, demand is
attributed to a person’s desire to consume wine at the present period or to invest
in wine for future consumption. The consumer maximizes lifetime utility subject
to the expected income over an individual’s lifetime, a vector of prices and
expected returns on investments. Following this approach, it is therefore not
surprising that wine is studied as a consumer good or as an investment or even as
a substitute to traditional financial assets.
In the standard consumer approach, it is assumed that there is an income
stream Yt, Yt+1, . . ., Yt+T where t represents the times at which the consumer’s
decisions are to be made and t + T represents his maximum possible attained age.
This income steam is split between a consumption plan (C) and an investment
plan (W) according to utility functions maximizing the total utility of the
consumer: U = a(•) g(Ct) + b(•) h(Wt), with a(•) and b(•) being the consumers’
subjective discount for consumption and investment in wine.
Knowledge of demand is essential to an understanding of how prices are
determined. The issue is not new and a simple economic approach considers that
the price is the result of supply and demand in a Walrasian equilibrium that
applies to all competitive markets. In the standard approach, price and quantity
are simultaneously determined by the interaction of supply and demand. In
recent decades, the renewed interest in the analysis of price formation is also
linked to the inclusion of a plurality of exchange situations and the specific role of
information. In a competitive market like wine involving many experts,
microeconomic and macroeconomic factors can explain the price differences.
A large set of literature is interested in the impact of public information
problems on the price of wine and techniques developed to reduce them. Experts
have been recognized to reduce asymmetric information by providing public
ratings and assessments of the quality. However, these expert grades are often
biased or suspected to be randomly distributed.
Because the demand function for wine derived from the maximization of
the utility function of the consumer is time dependent and depends on the
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XXIV EuAWE 2017
1
Bologna Conference
consumers’ subjective discount for consumption and investment in wine, another
piece of literature attempts to monitor the price of wine over time, that is to say,
the analysis of price dynamics. This implies following a wine over time by
observing sales. This literature has become abundant because wine indeed
appears increasingly as a financial asset substitution compared to traditional
assets.
The objective of this paper is to review all these approaches trying to
explain the price of wine. In this paper we only review the determinants of the
price of wine based three approaches: 1) the evaluation of properties or
characteristics of wine that give utility to consumers, i.e. referred to as hedonic
pricing, 2) a demand-supply approach, i.e. the supply factors that impact the
price, and 3) the analysis of price dynamics, i.e. the role of the market and under
what conditions it can explain the differences between the prices of different
wines.
The studies surveyed:
Using the classification of Outreville (2010) who summarized the
determinant factors, this section is structured according to the following table 1.
Table 1: Classification of Price Determinants
Geography/Viticulture
Time horizon
Public information
Production costs
Quantity supplied
Climate, Soil, Region, Grape variety
Age, Vintage
Label, Appellation, Reputation, Experts
Type of wine, Process, Yield, Fixed and variable costs
Volume of production, size, competition, scarcity
In this paper we have identified a list of 70 papers published on price
determinants. When looking at wine as a financial asset we can disentangle
between studies on auction markets and studies on financial markets. This survey
presents 30 papers examining the return to wine investment.
Key Words: Wine economics, price determinants, hedonic models, financial
markets.
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