Organizational Structure and Operation of the Illinois Wine Industry

Abstract

This study examines vertical coordination in the wine industry emerging in Illinois. We find that quality matters as temporal issues related to grape perishability increase the probability of written contracts being used to procure grapes. Holdup concerns related to sourcing adequate quality grapes and at-risk investments in grape storage and winemaking equipment lead to vertical integration. In general, larger wineries must obtain some grapes from outside vineyards and sell wine predominantly through tasting rooms and distributors. Smaller wineries rely more on direct sales to retailers, festivals, and farmers' markets. Marketing outlet selection also reflects the types of wine produced.

Regulation and Contract Choice in the Distribution of Wine

“…8 Franken and Bacon (2014) use a sample of 25 survey responses supplemented with U.S. Department of Agriculture data on 71 additional observations. Franken (2014) uses a sample of 105 grape procurement contracts.…”

“…Despite the relatively low response rate, the usable sample is larger than is often available for contracts research, particularly in the wine industry 8 . Franken and Bacon (2014) use a sample of 25 survey responses supplemented with U.S. Department of Agriculture data on 71 additional observations. Franken (2014) uses a sample of 105 grape procurement contracts.…”

“…Despite the growing importance of the wine industry in the U.S. agricultural economy, the value chain in wine is not well studied. Most economic research has focused on supply relations between wineries and wine grape growers (Fernández-Olmos, Rosell-Martínez, and Espitia-Escuer, 2009; Franken, 2014; Franken and Bacon, 2014; Goodhue et al, 2003; Zylbersztajn and Miele, 2005) or on consumer-level supply and demand characteristics (for a broad survey, see Storchmann, 2012). There is little research on the structure of the value chain between the winery and the retailers from whom the wine is ultimately purchased.…”

Risk management in wine industry: A review of the literature

“…This issue has been considered by Franken and Bacon [29] who have analyzed the role of vertical coordination strategy in decreasing the risks concerned to the procurement of required quality grapes. They report a study realized in California highlighting that formal written contracts stipulated for grapes procurement are more reliable than informal agreements because of the risk associated to the purchase of the required quality grapes.…”

Graphical Illustration of Interaction Effects in Binary Choice Models: A Note

“…Transaction cost economics is a leading paradigm in management and organisational studies and is gaining application in the study of vertical coordination and integration of agricultural marketing channels. Despite the hypothesised interaction effect, management scholars commonly consider either uncertainty, asset specificity or both, but neglect their interaction (David and Han, ; Carter and Hodgson, ), which also appears to be the case for related studies in various agricultural contexts (Knoeber, ; Hobbs, ; Sykuta and Parcell, ; Bhuyan, ; Franken and Bacon, ). Although this well‐known interaction effect makes TCE an excellent application for the graphical procedures demonstrated here, these procedures are relevant for any topic dealing with the influence of a power or product term on a binary variable of interest.…”