Abstract
AbstractThis paper develops a dynamic model of processor behavior which is applied to the California wine industry. Price, production, and input demand functions are derived from an optimal control model which takes into account inventory growth from aging and the linkage between product inventories and input purchases. An important feature of the model is that expected future market conditions and beginning inventories influence current behavior through changes in the inventory shadow price. The empirical results generally conform to the theoretical specification and emphasize the role of demand expectations on winery behavior.
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