Wine quality, reputation, denominations: How cooperatives and private wineries compete?

Abstract

We analyze how cooperatives in Northern Italy (Alto Adige and Trentino) compete with private wineries regarding product quality and reputation, i.e. if firm organization affects wine quality and winery reputation. Moreover, we examine if cooperatives with deep roots in their local economy specialize in specific regional denomination rules (i.e. DOC, IGT). Compared to private wineries, cooperatives face additional challenges in order to raise wine quality, among them appropriate incentives that induce individual growers to supply high quality grapes (e.g. vineyard management and grape pricing schemes to lower yields). The quality reputation of a winery with consumers depends crucially on its winemaking skills. Wine regions differ with respect to climatic conditions and quality denomination rules. Assuming similar climatic conditions within wine regions as well as winemaking skills between firms, incentive schemes to induce individual growers to supply high quality grapes and quality denomination rules remain crucial determinants of wine quality and winery reputation when comparing different regions and firm organizational forms. The data set analyzed allows differentiating local cooperatives vs. private wineries and denotes retail prices, wine quality evaluations, indicators for winery reputation, and distinct denomination rules. We employ a hedonic pricing model in order to test the following hypothesis: First, wines produced by cooperatives suffer a significant reputation and/or wine quality discount relative to wines from private producers. Second, cooperatives and/or private wineries specialize in specific wine denominations for which they receive a price premium relative the competing organizational form. Our results are mixed. However, we reject the hypothesis that cooperatives suffer a reputation/wine quality discount relative to private producers for the Alto Adige wine region. Moreover, we find that regional cooperatives and private wineries specialize in specific wine denomination for which they receive a relative price premium (e.g. Alto Adige cooperatives specialize in DOC relative to private wineries in the region; private wineries in Trentino specialize in IGT denominated wines emphasizing their own brands). Our results indicate regional differences in terms of how cooperatives compete with private wineries with respect to wine quality and reputation. If cooperatives are able to implement incentive schemes to induce individual growers to raise grape quality, they may also gain a wine quality and reputation premium in the market. Specialization in local denomination rules allows private wineries and cooperatives to capture premium prices in different market segments.