ECO535 Digital Economy

The wine making industry in California is the world fourth largest in the world if California is treated as a separate nation. The quality is of international attention with modern technologies of the production. The industry is highly concentrated with about 5 companies with a market share of 60% in the US wine industry (Wine Institute. ,2021). Hence we can say that it is an oligopolistic structure of market with few firms producing most of the volume of wine in US and also global market (Haraguchi  & Matsumura, 2016). Oligopolists tend to work as monopolists while charging price and the quantity they produce. Thus the total supply is determined the producers and not the demand. Thus the price too charged is high and it is done to maximize and earn supernormal profits in the short-run itself. The Oligopolists have two options while deciding the price. They can either become highly competitive to capture most of the market and act like perfect competitors which will eventually reduce the price and the profits. Or they can collude and act as monopoly producers charging very high prices and producing less quantity (Kumar  & Kutlu, 2016).

They also have impact on the supply chain of the region. When only few firms dominate the market they are likely to impact the supply chain specially the growers. Thus here in case of California Wine industry the vineries are the primary source of production. So when there are big firms taking all the production, it do produce some king of monopsony market when the market is looked from the farmers’ side. Hence buyers if are lesser will obviously have market power over the producers. The annual grape cultivation thus is the primary source the wine production. Crop failures can be detrimental for both the wine making firms and also the farmers. The whole supply chain experiences the market power of the Oligopolists. The number of warehouses the retail stores where the wine bottles are available the processing units and the packing units are very much exclusive to the firms ((Fritz,  2016). Old and renowned firms will exercise their market power in having full confidence of these supply chain entities. There is a level of trust and also strategies of packaging involved to attract consumers. These are highly exclusive and hence they too produce a vertical integration in the supply chain management (Saitone  & Sexton, 2017).

The main factors of production in the wine making industry are the labour, the capital, grapes (raw material) and the technology required to turn grapes into wine. The technology is highly responsible for the concentration as well as the raw grapes required. The quality of grapes that each company might need to create the wine is exclusive. They might obtain it from some specific vineyards and hence it is not available for new entrants in to the market. High barrier is there is terms of the availability of the right quality of grapes. This will develop olipolists who would want to capture both the factor of production market and also the retail or final goods market. The technology required to ferment, clarification and aging of the wine according to the type of grape that the firm is procuring is exclusive to each and every company. This is available to them only which makes it difficult for any new entrant in the market. It will obviously generate some market power over the way the method of production. The labours who are engaged in the companies are crucial because there are the initial stages of crushing and pressing and also handling the machineries used are exclusive to each firm. The experience and the technical knowhow is already utilized and the firms being age old will obviously claim that employment of new labours to happen in their firms (Zhou, 2018). Thus the market power is determined by these issues and in turn the market power determines the factor of production.  

The prediction that can be made regarding the concentration of the market is that it is ought to remain the same until some good and efficient cost effective technology of production comes to compete with the existing firms. There can also be changes in the concentration if the government comes up with some regulations in the market to maybe protect the farmers of the grapes. Recently

References

Fritz, A. T. (2016). The business of wine. Strategic winery tourism and management, 1-7.

Haraguchi, J., & Matsumura, T. (2016). Cournot–Bertrand comparison in a mixed oligopoly. Journal of Economics, 117(2), 117-136.

Kumar, R., & Kutlu, L. (2016). Price discrimination in quantity setting oligopoly. The Manchester School, 84(4), 482-505.

Saitone, T. L., & Sexton, R. J. (2017). Agri-food supply chain: evolution and performance with conflicting consumer and societal demands. European Review of Agricultural Economics, 44(4), 634-657.

Wine Institute. (2021). Wine Institute | The Advocacy Group for the California Wine Industry. Retrieved 9 March 2021, from https://wineinstitute.org/

Zhou, H. (2018). Impact of international trade on unemployment under oligopoly. The Journal of International Trade & Economic Development, 27(4), 365-379.