Dr. Jill McCluskey and her colleagues discovered older AVAs that produce consistent wines appeal to consumers of lower priced wines; pricier vintages are more dependent on the producer.

Pullman, Wash. -- An inconsistent product is one of the biggest obstacles to building the reputation of an appellation or wine brand, Washington state researchers have found.

“If your AVA is inconsistently producing quality, then that can hurt the price of your wine,” said Dr. Jill McCluskey, a professor in the School of Economic Sciences at Washington State University and co-author with Drs. Marco Costanigro and Christopher Goemans, both assistant professors at Colorado State University, of “The Economics of Nested Names: Name Specificity, Reputation and Price Premia,” published earlier this week by the American Association of Wine Economists.

The paper examines pricing trends in the California wine industry, looking specifically at the connection between AVA (American Viticultural Area) designations and firm reputations on wine pricing. Consumers seeking a value wine typically will base the choice on the winery’s region. A wine that proclaims its origins in a region known for producing good-quality wine -- especially an older, well-established AVA -- will fare better in the marketplace than a bottle from a lesser-known AVA.

McCluskey explained that consumers are willing to go with a general reputation when deciding among bottles from various lesser-known producers. But the more expensive the potential purchase, the more research consumers are willing to do about the actual producer. “It’s not that costly to be wrong when you’re buying an inexpensive bottle, but when you’re buying a more expensive bottle, it is more costly to be wrong,” she said.

Appellation is foundational to the success of more expensive wines, McCluskey said, but it plays a smaller role as a component of the overall price, because consumers examine the reputation of the producer more closely the more they’re planning to pay.”Most consumers may find it optimal to use aggregated names for inexpensive products, but at high prices, they may be willing pay to search more and form quality expectations on more specific names,” the paper states.

While consumers factor in the reputation associated with more specific information as the value of a wine increases, the role of sub-appellations is often overshadowed by the reputation of the older, more-encompassing appellation.

“Certain AVAs in California are very large, overlapping or entirely including smaller ones,” stated a note to the paper. “Generally, wine labels report only the smallest AVA name.... In the few cases in which two AVA names were found, the name of the oldest AVA was used.”

Based on this information, the paper determined that older appellations are more valuable in forming the reputation of a wine. The paper even pins a value to an appellation’s age: “According to our estimates, the AVA premium of the median wine increases each year by an average of $0.29, implying that older AVAs fetch higher prices at parity of (present and past) quality.”

However, McCluskey said a history of inconsistent quality will undermine the contributions both an appellation and firm contribute to value. She pointed out that the reputation of some older firms contribute to a negative price premium equivalent to about 3 cents per year in the overall value of a producer name.

“Consistency matters,” she said. “Wine is one of the unique industries where you want one of your close-by competitors to produce a high-quality product.”

Another eminent wine economist earlier had expressed some doubt about the value of increasing, and increasingly small, AVAs. Dr. Mike Veseth, Robert G. Albertson professor of international political economy at the University of Puget Sound, asked, “How many AVAs are enough?”

Commenting in April on approval of a new appellation for Washington’s Lake Chelan, Veseth told Wines & Vines that the new Lake Chelan AVA is a good idea in principle, but whether it highlights the unique character of local wines in a way that consumers understand is key. His concern is that too many AVAs have the potential to create confusion rather than clarity. Veseth believes the bigger factor in an AVA's success lies in its ability to develop a unique reputation for itself. A designation that helps a region do
this will have enduring value.

The new Lake Chelan AVA is a good idea in principle, he said, but whether it highlights the unique character of local wines in a way that consumers understand is key. His concern is that too many AVAs have the potential to create confusion rather than clarity. Veseth believes the bigger factor in an AVA’s success lies in its ability to develop a unique reputation for itself. A designation that helps a region do this will have enduring value.

The study of the value AVA and firm reputation contribute to pricing is part of a broader interest McCluskey has about the impact of product attributes on price. She previously authored a paper regarding the role played by sensory variables in consumer willingness to pay for Washington state wine. A future study will correlate spatial relationships between wineries to wine value.