Geographical Indications and Welfare: Evidence from the US Wine Market

Raj Chandra, Gabriel E. Lade, GianCarlo Moschini
December 2021  [21-WP 628]

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Suggested citation:

Chandra, R., G.E. Lade, and G. Moschini. 2021. "Geographical Indications and Welfare: Evidence from the US Wine Market." Working paper 21-WP 628. Center for Agricultural and Rural Development, Iowa State University.


Abstract

A systematic component of wine quality is believed to depend on the geo-climatic factors of its production conditions. This belief has long been a motivation for the development of geographical indications for wines. In the United States, American Viticulture Areas (AVAs) represent the most common geographic factor firms use to differentiate their products. In this paper, we estimate a discrete choice model of US wine demand to study the market and welfare impact of AVAs. Specifically, we develop a two-level nested logit choice model, featuring many wine products and characteristics—including wine type, brands, and varietals, in addition to AVAs—and estimate it using Nielsen Consumer Panel data over the 2007–2019 period. We find significant welfare gains from AVA information on wine labels. Over the period of interest, the welfare gain attributable to AVAs is estimated at about $2.37 billion, with wine producers and retailers capturing approximately 80% of this surplus. Approximately 90% of consumer welfare gains are due to product differentiation and increased variety, with the remaining gains due to price decreases resulting from increased product competition.