How Income and Crowding Effects influence the World Market for French Wines

Wine prices rose rapidly between 2001 and 2011 but have now stagnated. The growth phase could be explained by the increased demand from emerging markets while the subsequent stagnation may result from the crowding effect caused by the entry of numerous new varieties onto the wine market. The generalized model of ideal variety proposed by Hummels and Lugovskyy (2009) combines these two elements and focusing on French exporters, we find partial support for this explanation at the world level. A 1% increase in GDP per-capita (income effect) generated an increase in price of 1.13% between 2001 and 2011. In contrast a 1% increase in market size (competition effect) reduced prices by 1.10% over the same period. This paper goes further into the analysis of these effects by considering wine exports according to the mode of transport used and indirectly evaluates economies of scale when wine is exported by land, sea or air (via a gravity equation). Economies of scale are observed for transport by plane and ship but not for road. A 10% increase in the value of wine exported by road (plane) leads to a rise (reduction) in transport costs of 0.5% (19%)