WINE FIRM BEHAVIOR
1. Three important choices wine firms make
a. Price
b. Quality
c. Sourcing
2. Price and quality behavior
a. Commodity submarket
b. Luxury and premium submarket
3. Commodity submarket
a. Market structure
1. Oligopoly
b. Two types of behavior
1. Cooperation
2. Competition
c. Cooperative behavior
1. Cartel
2. Tacit collusion
a. Price leadership
d. Competitive behavior
1. Price competition
2. Nonprice competition
4. Premium and luxury submarket
a. Scott-Morton and Podolny Theory
1. Assumptions
a. Profit-max and utility-max firms
b. Market structure is monopolistic competition
c. Owners make rational choices
d. Owners differ in their ability to produce wine
e. Owners learn by doing
2. Example of seemingly uneconomic behavior
a. Rational decision to increase wine quality
3. Implications and predictions of the theory
a. Utility-max owners are willing and able to produce higher
quality wine products than profit-max owners
b. Utility-max owners have lower average ability, higher marginal
cost, and higher price for a given wine quality
c. The longer an owner produces wine, the lower the marginal cost
and price
4. Empirical evidence
a. Data: Sample of 184 California wine firms
b. Utility-max owners produce upper-end premium and luxury wine
c. Profit-max owners produce lower-end premium wine
d. Utility max owners charge a higher price for the same quality wine
e. The longer an owner produces wine, the lower the price
f. The price of wine of utility-max owners falls faster over time than
profit-max owners
g. Utility-max owners produce wine that satisfies consumer preferences
and their own preferences
h. Profit-max owners produce wine that satisfies consumers preferences
i. Utility-max owners outcompete profit-max owners in the upper-end
premium and luxury submarket, and dominate this market
5. Conveying information about quality
a. Akerlof’s lemons theory
b. Quality signals and indicators
1. Reputation
2. Advertisements
3. Image
4. Critic scores
5. Wine competitions
6. Bottle label
6. Sourcing behavior
a. Logic of the sourcing choice
b. Factors that affect the sourcing choice
1. Transaction cost
2. Production cost
3. Product quality
4. Nonmarket goods
c. Factors that affect transaction cost
1. Uncertainty
a. Contingencies, measurement, asymmetric information
b. Uncertainty
c. Opportunistic behavior
d. Contracting cost
e. Transaction cost
2. Asset specificity
a. Degree of asset specificity (das)
1. das = cost of asset – value of asset in next best use
b. Opportunistic behavior
c. Contracting cost
d. Transaction cost
d. Factors that affect production cost
1. Economies and diseconomies of scale
a. Specialization
b. Volume discounts
c. Spreading overhead
d. Difficulty of organizing and coordinating activities
2. Economies of scope
a. Common input(s)
3. Firm capability
a. Endowment of resources
1. Human capital
2. Physical capital
3. Land
e. Factors that affect product quality
1. Degree of control
2. Firm capability
f. Examples of nonmarket goods
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