@inbook{1c7b09439ea74d58aa17bd967e27051a,
title = "Wine futures: Pricing and allocation as levers against quality uncertainty",
abstract = "This study examines the impact of using wine futures in order to mitigate the winemaker{\textquoteright}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{\textquoteright}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.",
keywords = "Futures pricing, Quality uncertainty, Stochastic optimization, Wine futures",
author = "Tim Noparumpa and Burak Kazaz and Scott Webster",
note = "Funding Information: Acknowledgments We are grateful to Liv-ex.com for their generosity with data; the study would not have been possible without their contribution. We are grateful to Mr. Ben O{\textquoteright}Donnell of Wine Spectator for his insights on our study. We are also thankful to Tom and Susan Higgins of Heart and Hands Wine Co. for sharing data about the winery and the industry. The paper has benefited from participants{\textquoteright} feedback through presentations at Arizona State University, the Third Supply Chain Finance Conference in 2013 in Eindhoven, The Netherlands, at Analytics Operations Engineering Inc., at Boston University, at the 2014 Euro Working Group for Commodities and Financial Modelling in Milan, Italy, and at the University of Milano Bicocca. This study was partially supported by the Robert H. Brethen Operations Management Institute and the H.H. Franklin Center for Supply Chain Management at Syracuse University. Publisher Copyright: {\textcopyright} 2018, Springer International Publishing AG.",
year = "2018",
doi = "10.1007/978-3-319-61320-8_6",
language = "English (US)",
series = "International Series in Operations Research and Management Science",
publisher = "Springer New York LLC",
pages = "113--139",
booktitle = "International Series in Operations Research and Management Science",
}