A Prescriptive Model for Selling Wine Futures to Mitigate Quality Uncertainty

Tim Noparumpa, Burak Kazaz, Scott Webster

Research output: Chapter in Book/Report/Conference proceedingChapter

Abstract

This study examines the use of advance selling in the wine industry as a form of operational flexibility to mitigate quality rating risk. The process of making fine wine begins after the harvesting season. During this time, grapes are sorted, pressed into juice, and are left to be fermented in barrels for up to 2 years. After 6 to 8 months of barrel aging, wine experts are invited to taste the wine, and a barrel score out of 100 is assigned. This barrel score acts as an indicator of the potential quality of the wine. At this time, based on the barrel score, the winemaker must decide on two key decisions: (1) the amount of wine to be allocated for sales as futures and (2) the price of wine futures. After one more year of aging, the wine is bottled and is sent to the same set of reviewers to receive a final bottle score, which in turns influences the market price for retail. We present a prescriptive analytical model that incorporates both the uncertain bottle score assigned to the wine and the uncertain consumer valuation of wine futures. Through the analysis of the analytical model, we illustrate the effect of changing the barrel score, the winemaker’s and consumers’ risk preferences, and the degree of consumer heterogeneity, on the winemaker’s optimal decisions and profitability. In addition to the analytical model, the study presents a comprehensive numerical study to further highlights effects of barrel scores on the winemaker’s decisions. The findings from the numerical study illustrate the effectiveness of the analytical model and the potential financial impact of wine futures as tool to help winemaker mitigate quality rating risk.

Original languageEnglish (US)
Title of host publicationSpringer Series in Supply Chain Management
PublisherSpringer Nature
Pages123-139
Number of pages17
DOIs
StatePublished - 2022
Externally publishedYes

Publication series

NameSpringer Series in Supply Chain Management
Volume12
ISSN (Print)2365-6395
ISSN (Electronic)2365-6409

Keywords

  • Advance selling
  • Pricing
  • Quality uncertainty
  • Wine futures

ASJC Scopus subject areas

  • Management of Technology and Innovation
  • Management Science and Operations Research
  • Control and Optimization

Fingerprint

Dive into the research topics of 'A Prescriptive Model for Selling Wine Futures to Mitigate Quality Uncertainty'. Together they form a unique fingerprint.

Cite this