Economic incentives for vertical product differentiation in the Brazilian wine sector

While wine is traditionally viewed as a product typical of European and Mediterranean wine producing countries, in recent decades vineyards have developed in all continents. Consequently, wines have been classified as coming from the Old World (traditional European and Middle Eastern producers), and New World (countries who developed their tradition in wine making more recently). Apart from individual taste, the marketing strategy adopted in these two origins clearly differentiates: based largely on the place of origin in the Old World by means of Appellation of Origin labelling; and based predominantly on the vine grown in the New World. Nonetheless, quality segmentation seems to have become more frequent in the New World, as it allows producers to compete in different segments of the market. In this work, we use data from Brazilian wine producing firms located in the Vale dos Vinhedos, State of Rio Grande do Sul, a region producing about 90% of all Brazilian wine. Brazilian firms have recently started to differentiate products by origin-based quality signals; they supply the markets with multiple products and are increasing market segmentation. Within this particular wine district, we estimate a production function for different wine categories, identifying the different factors contributing to the changing marketing strategy in the study area. Results indicate that vertical differentiation is a strategy pursued to optimise the economic efficiency of inputs. In particular, expenditure on product-related inputs (e.g. grape, bottle) are particularly important for lower segments, whilst expenditures in quality-related inputs (e.g. labour) are crucial for high quality wines. Consequently, it appears that vertical differentiation in the wine market is the consequence of economic incentives focusing on efficiency, rather than political or economic rent.