In Vino Veritas: Wine Prices in Slovenia

Wine market reveals some interesting truths about the pattern of international trade in differentiated goods. We examine a large sample of domestic and foreign wines sold in Slovenian supermarkets and specialized wine shops in 2009. In our sample, imported wine is on average more expensive and of better quality than domestic wine. Higher quality wines sell at higher prices and quality-adjusted prices increase in quality. We present a heterogeneous firms model with endogenous quality choice and non-constant mark-ups that matches the above mentioned stylized facts. The model incorporates quality competition among the differentiated products into the Melitz and Ottaviano (2008) framework and predicts that more productive wine producers choose higher quality upgrade and charge higher prices because they are able to raise their mark-up by more than their marginal cost advantage. Several implications of the theoretical model are empirically tested on the data, using product-, firm-, and country-level information and employing hedonic price function analysis for complete market and predetermined segments of the market. Empirical analysis confirms the existing evidence in the literature that quality, objective factors as well as reputation factors affect wine prices. Segmentations of the wine market on the basis of origin, variety and price are examined as well, and we confirm the findings of Costanigro et al. (2007) that price segmentation seems to be the most appropriate judging on explanatory power.