Fairtrade Wine Price Dispersion in the United Kingdom

Abstract

This paper analyzes wine price dispersion in the United Kingdom. In particular, we are interested in examining whether Fairtrade wines are different from non-Fairtrade wines. Because Fairtrade wines serve an additional social purpose, one may think that consumers search less aggressively for the outlet with the lowest price, thus allowing for a larger price dispersion than for regular wines. We draw on data for about seven thousand wines from South Africa, Fairtrade and non-Fairtrade, sold in the United Kingdom between 2007 and 2012. In a first step, we run a hedonic regression model explaining the wine prices using Ordinary Least Squares (OLS) and Two-Stage Least Squares (2SLS) Instrumental Variable (IV) approaches. In the next step, we regress the squared residuals from the first step on a Fairtrade 0-1 dummy-variable. When using the squared residuals from the OLS model, we find that Fairtrade is a negative determinant of price dispersion. Therefore, Fairtrade wines exhibit a significant lower price dispersion than the comparison group. When using the squared residuals from the IV model, we find mixed results and suspect the presence of a substantial bias due to weak instruments. Finally, in order to avoid IV pitfalls, we ran Fairtrade and Non-Fairtrade wines in separate equations. We find support for the OLS results, i.e., Fairtrade wines appear to exhibit lower price dispersion than their non-Fairtrade counterparts. Whether this is due to consumer search is a priori unclear. (JEL Classifications: L31, L81, Q11)

Preferences for eco certified wines in the United States

“…Today, fair trade ensures that certified wines are produced with safe labor conditions, use environmentally friendly practices and that farmers are paid a base price for their crops (Beirne, 2008). Evidence suggests that the certification has developed real change in the labor market and has allowed for historically disadvantaged farm workers to enter the global wine industry (Moseley, 2008;Niklas et al, 2017).…”

“…While one study found that consumer awareness in North America, for certifications, was low (Schaufele and Hamm, 2017), other studies in Spain (Sellers, 2016) and New Zealand (Forbes et al, 2009) found that consumers are willing to pay a premium for eco-certified wine. For organic wines, there is a propensity to pay a premium price (Remaud et al, 2008;Bazoche et al, 2008) and some consumers would be willing to tolerate higher prices for fair trade certified wine (Niklas et al, 2017). In Italy, researchers found that a sample of consumers had a positive WTP for natural wines (Galati et al, 2019).…”

Margins of Fair Trade Wine along the Supply Chain: Evidence from South African Wine in the U.S. Market

“…A possible explanation could be the “warm glow effect” and the resulting higher willingness-to-pay for an ethically superior product. This would contradict Niklas, Storchmann and Vink (2017) who found smaller price dispersions for FT wines in the United Kingdom, indicating a higher degree of search and thus higher price elasticities than for non-FT wines. Likewise, Delmas and collaborators (e.g., Delmas and Grant, 2014; Delmas and Lessem, 2017) could not find any “warm glow” price effect for organic wines in the United States.…”

“…Niklas, Storchmann, and Vink (2017) analyze retail prices of FT wines in the United Kingdom. First, they find a significant price discount for FT wines compared to their non-FT counterfactuals—even after controlling for quality, grape variety, age, and producer fixed-effects.…”

“…Despite their positive attitude toward sustainable wine, many consumers, especially in lower income brackets, prefer to purchase conventional wine, suggesting the absence of a higher WTP for eco-certified wine. Niklas, Storchmann, and Vink (2017) analyze retail prices of FT wines in the United Kingdom. First, they find a significant price discount for FT wines compared to their non-FT counterfactuals-even after controlling for quality, grape variety, age, and producer fixed-effects.…”