What do we know about Price and Income Elasticities of Demand for Wine?

1. What do we know about Price and Income Elasticities of Demand for Wine? Leslie Butler, UC Davis Sara Savastano, Univ. of Rome Marianne Wolf, Cal Poly SLO Presentation to the AAWE/AARES Conference Workshop “The World’s Wine Markets by 2030”, February 7-9, 2010

2. Basic Premise • Lots of studies that estimate the price and income elasticities for wine. • Little agreement about the magnitudes. • Wide variety of estimates. • Large variation in model specifications, data sets, and method of estimation.

3. Selected PED Estimates

4. Basic Premise • Elasticities all over the show! • Is the PED for wine elastic or inelastic? • Is there a difference between red and white wine? Different varietals? • Are there differences between short run and long run estimates? • What about differences between pricing points?

5. Practical Uses • Given the recent economic crisis and downturn: how are wine makers, purveyors, retailers expected to make decisions about whether to reduce prices or increase advertising expenditures? • How do income elasticities and price elasticities affect the final decisions of wine makers and marketers? • Do elasticities change over time?

6. The Point… • The point is that when we ask these questions we begin to realize that: • We know very little about the demand for wine and how consumers react to changing economic conditions and price changes. • This is really, really messy stuff! • We do not pretend to have the correct answer • We want to encourage economists to look for better answers; a sort of “new methodology”.

7. Is there an ideal model? • Several studies have pondered questions about how to best treat the demand for wine, beer, spirits and alcohol. • Many have asked the same questions. • Tsolakis, Reithmuller and Watts (Rev Mkt and Ag Econ, 1983) • Gallet (Aus J. Ag & Res Econ, 2007) • Numerous other studies

8. What would an ideal model look like? • Macro-variables: • Country or area • Culture • Consumption patterns • Stage of life-cycle • Substitutes, complements • Imports, exports

9. What would an ideal model look like? • Micro-variables: • Reds, whites, varietals • Price brackets, • Consumer demographics (gender, age, income bracket) • Consumer desirability characteristics (including likelihood of changes in consumption due to changes in economic conditions)

10. Consumption and Demand.. • These questions are part of a much larger, deeper and more fundamental debate about the life-cycle model of behavior in consumption. • Current debate: • Do people consume out of current income?, • Or is consumption better explained by the permanent income hypothesis of Modigliani, Friedman, and others?

11. In other words….. With the boom and bust cycles in demand for wine that we have witnessed over the last century, and especially more recently, one question is: is the decline in demand for wine due to a fall in current income, or does it reflect uncertainty about the future that encourages consumers to adjust their expectations of the status of their permanent income??

12. Demand for food and other non-durables… • Rulon Pope (AJAE, 2009) recently reviewed some of the literature on this broader view of consumption and demand in his Fellows Address to the AAEA. • His conclusions also raise many questions about how we should be viewing demand for food and other non-durables.

13. In summary • In particular, Pope argues for the inclusion of a much broader range of information in our demand equations, including: • Planning time horizon • Age • Survival probabilities • Rate of return on investments • Cash on hand • Bequests • Other demographics