Incentive structures: quality competition and the production of fine Californian wines

ABSTRACT

When and for whom does it pay to make high-quality products? In this paper, I address this question through the lens of Harrison White’s socioeconomic models of production. The socioeconomic models relate economist incentives of cost-efficiency to sociological insights into the construction of quality on markets. Differences in firm size and quality sustain distinct market niches whose appeal to producers vary. The ordering of niches by quality and associated implications for profitability establish the incentive structure of the market. As illustration, I trace the evolution of the Californian wine industry from its nadir under prohibition to today. The account motivates a productive reading of the socio-economic models that tempers their analytical focus and broadens their scope of application.

KEYWORDS:

• Mathematical modeling
• production markets
• theory

Notes

¹ While important work has built on White’s presentation of production markets as differentiated role structures (for many, see Fligstein, 1996; Kennedy, 2005; Podolny, 1993; Zuckerman, 1999), I am referring to a lack of research which draws explicitly on the market plane as it is presented in this paper. This lack of engagement is all the more puzzling in light of initial excitement about noted overlaps with the Économie des Conventions (Diaz-Bone, 2010; Favereau & Lazega, 2002; Favereau, Biencourt, & Eymard-Duvernay, 2002; White, 2002a, c). Remarkably, this predominantly French school of thought has grappled with the etiology of quality, albeit primarily from a processual perspective (Musselin & Paradeise, 2005). White’s own work has been conceptual, and one early application of the market plane, by Biencourt and Urrutiaguer (2002), has remained essentially without follow-up.

² This use of γ marks a simplifying departure from White’s original model. In White’s deductive account, γ acts indirectly, as a discount on buyers’ aggregated demand that producers anticipate and take into account as the ‘deal criterion’, $\theta$ (cf. Appendix A). The deal criterion ensures that each producer’s profit-maximal output volume is finite and determinable (see White, 2002a, chapter 6 for details). Here, I treat γ as an ex post constraint, or reality check, to the producers´ optimization efforts. This preserves White’s distinction between crowded and explosive regimes.

³ Note that this trade-off cannot be captured in White’s formal-deductive account, which insists that output volume precedes and signals quality. According to White, any one producer’s decision to change its output volume ripples through the market as it affects the quality of all producers on the market (Leifer, 1985).

⁴ The Wickersham Commission estimated that 111 million gallons of wine were being produced across the USA by 1930, more than twice the pre-prohibition level of 1919 (Wickersham, 1931, 127 f.). More conservatively, Johnson (1989) estimated average production at 76 million gallons; still significantly more than the record-breaking 50 million gallons made in pre-prohibition years.

⁵ In an interview conducted for the Wine Industry Oral History Project, winemaker André Tchelistcheff recalled that after repeal, “the fine quality grapes were sold for twenty-five, thirty dollars a ton, and the cost of production was about thirty-eight to forty.” (Tchelistcheff, 1979).

⁶ Among them Robert Parker, who was so influenced by his visit to the Bordeaux-region in the 1960s that he later gave up a career as a lawyer to become an extraordinarily successful wine critic (McCoy, 2005).

Additional information

Funding

This work was supported by the FAZIT Foundation.