Transcript What do we know about Price and Income Elasticities of

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
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.
Selected PED Estimates
Taplin & Ryan
Aus
>-1
Price Elastic
Miller & Roberts
Aus
-1.8
Table wine
Labys
Aus
-1.0
Clements & Johnson
Aus
- 0.43
Labys
USA
- 0.44
Domestic
Labys
USA
-1.654
Imports
Johnson & Oksanen
Canada
- 0.502
den Butter, et al
France
- 0.9 to -1.0
Various scens.
den Butter, et al
Germ
-0.11 to - 0.21
Various scens
den Butter, et al
Neth
+ 0.36 to - 0.88
Various scens
Gallet
World?
- 0.7
Med. of 1172 est.
Gallet
World?
-1.11
Meta-Analysis
Tsolakis et al
Aus
- 0.428 (SR) -1.349 (LR)
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?
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?
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”.
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
What would an ideal model look
like?
• Macro-variables:
– Country or area
– Culture
– Consumption patterns
– Stage of life-cycle
– Substitutes, complements
– Imports, exports
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)
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?
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??
Demand for food and other nondurables…
• 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.
In summary
• In particular, Pope argues for the inclusion of a
much broader range of information in our
demand equations, including:
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Planning time horizon
Age
Survival probabilities
Rate of return on investments
Cash on hand
Bequests
Other demographics