The market structure–performance relationship applied to the Canadian wine industry

Abstract

The purpose of this research is to examine the relationship between market structure and performance in the wine sector using data from two Canadian provinces. Investigation is conducted on alternative hypothesis defined as the Structure–Conduct–Performance hypothesis, the Relative–Market–Power hypothesis and the Efficiency Structure (ES) hypothesis. The measure of performance is related to the reputation of wineries and expert ratings. Using regression analysis, we find support to the ES hypothesis. The empirical findings suggest that more research should be done on the ES of wineries in their respective markets.

Keywords:

• wine industry
• market structure
• performance

JEL Classification:

• L11
• L66
• D40

Notes

¹ See Feuerstein (2005) for a current survey of the associated body of literature on collusion in industrial economics.

² Similarly, the Quiet Life Hypothesis of Hicks (1935) explained that firms with greater market power may take advantage of the gains from noncompetitive pricing. Berger and Hannan (1998) found that quiet life effects in banking appeared to be several times larger than social losses associated with the mispricing of products from market power.

³ Porter (1980) identified five forces (characteristic of market structure) that influence a market’s conduct, which in turn determines the market’s performance. Four of the forces can be considered external to the industry: The threat of entry, the threat of substitution, the bargaining power of consumers, and the bargaining power of suppliers. The fifth force, the level of market competition, is conceived of as an internal force and is generically described as the intensity of rivalry among current market competitors. Additionally, Porter (1991) later noted that these dynamics are subject to the influence of regulatory oversight, which may serve as a catalyst (or inhibitor) of innovation in the marketplace.

⁴ See Edwards et al. (2006) for a survey in agricultural products.

⁵ In the empirical literature, several measures of competition are used among which the Herfindahl index and the Price Cost Margin (or Lerner index) are the most popular ones. These measures have been criticized by Boone (2008a, 2008b) who introduces a Relative Profit Differences measure. Boone shows that as competition increases, profits of the most efficient firm will rise more than the least efficient firm.

⁶ Since both variables are perfectly correlated, they cannot be used simultaneously in a regression.

⁷ Wine Access magazine, its website and all associated programmes have been discontinued in 2013. Awards are posted by the Canadian Wine Trail (//canadianwinetrail.com/).