Thursday, August 29, 2013
Posted by D. Daniel Sokol
Ian B. Page, Department of Agricultural and Resource Economics, University of Maryland asks Why Do Distilleries Produce Multiple Ages of Whisky?
ABSTRACT: Unlike many other vintage goods, distilleries often opt to mature their stocks to different ages, selling a heterogeneous line of products which vary in quality. We develop a theoretical model to examine the maturation decisions of a whisky distillery and find that it is possible for a profit-maximizing distillery to produce multiple ages of whisky under perfect competition. Based on an analysis of retail whisky prices, we find evidence suggesting that most distilleries that produce multiple ages of whisky do not operate under perfect competition. However, a hedonic estimation of whisky prices does not find any strong link between a distillery’s size and its ability to influence market prices, suggesting that distilleries may achieve market power through brand recognition.