Quality classifications in competition: Price formation in the German wine market

How do judgment devices influence price formation? We investigate this question through a study of the German wine market. The German wine market is characterized by the simultaneous existence of two classification systems: the official classification system referring to the quality in the glass, and the concept of terroir, introduced by a private association of quality winemakers, the Verband deutscher Prädikatsweingüter. We used a data set comprising 1,890 wines from 248 different wineries in the German wine-growing regions of Rheingau and Rheinhessen. Our results show that the two classification systems function as mutually exclusive strategic options for winemakers. We also show that the non-official classification of terroir is much more powerful in explaining price formation within the market.