Bailout

Organic wine datapoint of the day

By Felix Salmon

Meg Sullivan has a good write-up of a paper by Magali Delmas and Laura Grant, which asks a simple question:

Why would wineries seek costly eco- certification without informing their customers about it?

The answer turns out to be surprisingly simple.

Our results show that eco-labeling has a negative impact on prices in the wine industry, while there is a price premium associated with eco-certification. Overall, certifying wine increases the price by 13%, yet including an eco-label reduces the price by 20%, confirming the negative connotation consumers apply to ?green wine.? The premium puzzle for this luxury good is driven by certification rather than its label, a confounding result not previously documented.

This is a huge result: non-labeled organic wines cost 13% more than non-organic wines. But labeled organic wines cost 20% less than non-organic wines. Which implies that if you take the “organic” label off your Californian wine, you can raise its price by more than 40%.

As Sullivan says, this presents an easy and obvious arbitrage for consumers: buy wines which are labeled organic, and you save lots of money.

Essentially, what’s going on here is pretty simple: winemakers know that organic wines taste better, but consumers think that organic wines taste worse. So winemakers make organic wines without telling consumers, and consumers happily pay up for them so long as they don’t know they’re organic. When consumers do know the wine is organic, however, they won’t pay nearly as much.

There’s a problem here with organic wine (no added sulfites) as opposed to wine made from organic grapes. Organic wine does taste better, but it can age badly, and it tends to turn to vinegar much more quickly after the bottle has been opened. If you know that the wine is organic, that isn’t a problem: you just drink it within a few months of buying it, and you don’t try to save it for the following day. But if you don’t know that the wine is organic, you can end up being disappointed in it when you treat it like any wine made with sulfites.

So let’s hope that consumers wise up about organic wine soon, and for the time being, those of us who know the secret can continue to happily play the arbitrage.

(Via Cowen)

Full post as published by Macroprudential on March 07, 2010 (boomark / email).