Wine futures: Pricing and allocation as levers against quality uncertainty

Tim Noparumpa, Burak Kazaz, Scott Webster

Research output: Chapter in Book/Report/Conference proceedingChapter

Abstract

This study examines the impact of using wine futures in order to mitigate the winemaker’s risk stemming from quality uncertainty. In each vintage, a winemaker harvests grapes and crushes them in order to make wine. A premium wine sits in barrels for 18–24 months. During the aging process, tasting experts take samples and establish a barrel score; this barrel score often indicates the expert’s perception of whether the wine will be a superior wine. Based on the barrel score, the winemaker can sell some or all of her/his wine in the form of wine futures and in advance of bottling. The winemaker makes three decisions: (1) the price to sell her/his wine futures, (2) the quantity of wine futures to be sold in advance, and (3) the amount of wine to be kept for retail and distribution. The wine continues to age for one more year after barrel samples. The tasting experts then provide a bottle score upon the bottling of the wine. At the time the winemaker determines the price and quantity of wine futures, this unrealized bottle score represents the uncertainty that influences the market price of the wine. This study makes two contributions to the optimization of pricing and quantity decisions and offers insightful recommendations for practicing managers. First, it develops a stochastic optimization model that integrates uncertain consumer valuations of wine both in the form of futures and in bottle, and the uncertainty associated with bottle scores. Second, it provides an empirical analysis using data collected from Bordeaux wineries engaging in wine futures. The empirical analysis demonstrates that wine futures can be used as price and quantity levers to mitigate the negative consequences of quality uncertainty. The results provide clues as to how other markets (e.g. Italy and the U.S.) can establish similar wine futures markets in order to help their small and artisanal winemakers.

LanguageEnglish (US)
Title of host publicationInternational Series in Operations Research and Management Science
PublisherSpringer New York LLC
Pages113-139
Number of pages27
Volume257
DOIs
StatePublished - 2018

Publication series

NameInternational Series in Operations Research and Management Science
Volume257
ISSN (Print)0884-8289

Fingerprint

Wine
Pricing
Uncertainty
Costs
Empirical Analysis
Bottles
Stochastic Optimization
Optimization Model
Valuation
Stochastic Model
Quality uncertainty
Futures pricing
Recommendations
Continue
Integrate
Optimization
Demonstrate
Market

Keywords

  • Futures pricing
  • Quality uncertainty
  • Stochastic optimization
  • Wine futures

ASJC Scopus subject areas

  • Software
  • Computer Science Applications
  • Strategy and Management
  • Management Science and Operations Research
  • Applied Mathematics

Cite this

Noparumpa, T., Kazaz, B., & Webster, S. (2018). Wine futures: Pricing and allocation as levers against quality uncertainty. In International Series in Operations Research and Management Science (Vol. 257, pp. 113-139). (International Series in Operations Research and Management Science; Vol. 257). Springer New York LLC. DOI: 10.1007/978-3-319-61320-8_6

Wine futures : Pricing and allocation as levers against quality uncertainty. / Noparumpa, Tim; Kazaz, Burak; Webster, Scott.

International Series in Operations Research and Management Science. Vol. 257 Springer New York LLC, 2018. p. 113-139 (International Series in Operations Research and Management Science; Vol. 257).

Research output: Chapter in Book/Report/Conference proceedingChapter

Noparumpa, T, Kazaz, B & Webster, S 2018, Wine futures: Pricing and allocation as levers against quality uncertainty. in International Series in Operations Research and Management Science. vol. 257, International Series in Operations Research and Management Science, vol. 257, Springer New York LLC, pp. 113-139. DOI: 10.1007/978-3-319-61320-8_6
Noparumpa T, Kazaz B, Webster S. Wine futures: Pricing and allocation as levers against quality uncertainty. In International Series in Operations Research and Management Science. Vol. 257. Springer New York LLC. 2018. p. 113-139. (International Series in Operations Research and Management Science). Available from, DOI: 10.1007/978-3-319-61320-8_6
Noparumpa, Tim ; Kazaz, Burak ; Webster, Scott. / Wine futures : Pricing and allocation as levers against quality uncertainty. International Series in Operations Research and Management Science. Vol. 257 Springer New York LLC, 2018. pp. 113-139 (International Series in Operations Research and Management Science).
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