Wine Economics

The relationship between the price of a bottle of wine and its taste is weak, according to two studies in the inaugural issue of the Journal of Wine Economics. Using a price equation to compare more than 1,000 bottles of Bordeaux and Burgundy wines tasted blindly by experts, Sébastien Lecocq and Michael Visser, of the French National Institute for Agricultural Research (INRA), find that the price of wine is largely determined by objective standards such as colour, ranking and vintage, rather than simply by taste and smell.

Similar results were found by Pierre Combris and Sylvie Issanchou, of INRA, and Christine Lange, of France's National Centre for Scientific Research, who observed how 120 people bid on non-vintage champagne after tasting it blind, after inspecting only the bottle, and after tasting it while seeing the bottle. The bidding was 33% higher when tasters could only see the bottle than it was with blind tasting, implying that the champagne's taste detracted from its perceived value.

“The label is a big part of the glamour,” says James Miles, director of the London International Vintners Exchange, an electronic exchange for fine wine. But although wine's intrinsic value may be debatable, its market value is not. Investing in wine has become a popular way of diversifying a financial portfolio. In 2002, when the FTSE 100 share index fell by 24.5%, the Decanter Bordeaux Index of 1,300 wines went up by 8.5%, according to “Wine Investment for Portfolio Diversification”, a book by Mahesh Kumar. The Liv-ex 100 wine index, which tracks the price of 100 fine wines, has risen by 55% in the last year and the fine-wine market is now worth more than £1 billion ($1.9 billion), according to Mr Miles. Hype generated this year by the 2005 Bordeaux, considered the best in a generation, has helped.

Interest in wine investment has also spurred the creation of new wine funds, including the Fine Wine Fund in August, charging a 2% management fee and 15% performance fee. Better availability of price information and more demand for wine in emerging markets has created a fine-wine bull market

.
-Fruity little numbers

Discuss; What does this imply about the marginal rate of substitution of different brands of wines?

Related
Beer Economics
Arguea, N. and Hsiao, C. (1993). Econometric issues of estimating hedonic price functions. Journal of Econometrics, 56, 243-267.
Oczkowski, E. (2001). Hedonic wine price functions and measurement error. Economic Record, 77, 374-382