Regulation and Hotelling

An interesting question popped up on an episode of Ask a Winemaker. The host asked "Do you think that an identity of a Santa Barbara Syrah would be arrived at more switfly with less or more regulation?" The vintner's answer was yes, they would arrive at a recognizable character for the wines from their area if growers were limited in their choices of which clones to plant and how to make their wines. It was apparently assumed that recognition, or a consistent style, would be a good thing for the wine makers, probably so their customers would know what to expect based on appellation. Like Bordeaux or Burgundy or Napa Cabernets.



This is an interesting question, at first my libertarian hackles popped up and I thought "Of course less regulation is better." But the question wasn't asking how to get to the best wine, the question was how to get a recognizable wine quickly and was probably a better question than asking how to get to the best wine. There's definite value to producers in developing a recognizable brand quickly. They can hotel and save costs on educating their customers if they can say "We're a Santa Barbara Syrah" and customers know what characteristics that implies. They lose some competetiveness against other wineries in the same appellation, it will be easier for customers to substitute between the wineries of one appellation, but on the other hand, a winery limits the number of competitors it has to distinguish itself from if it is a member of a well defined appellation. It gives them free distinction from non Santa Barbara vineyards, so they have a much smaller group to distinguish themselves from.

I wonder what the efficiency tradeoffs look like for, say, French style regulation on what varietals a winery can put in their bottles or even plant. The downside of regulation is an almost certainly sub optimal product; a good but not the best wine possible. On the other hand, completely unregulated areas like we have in the US where everyone is trying their own thing will almost certainly lead to the "best" wine being made, but how long will it take to get there? There is going to be a lot of wine that isn't even good enough and a lot of firms will go out of business trying to figure out what the best is. Is the cost of the time it takes to figure out what is best more costly, or is forcing everybody to make something that's 80% as good as the best possible worse in the long run?

It's an interesting question and I think that different industries will have different balances. (Assuming it doesn't turn out that 80% "best" is never as good as 10% best for some time then 95-100% "best" in perpetuity. Gotta be some discount of "in perpetuity" there though.")

I need to read more Hayek, this seems to be a question of spontaneous order verses planning. I wonder if combining the two to come up with some sort of 80/20 type rule would work out? Perhaps you can let indivicuals or individual firms try to figure things out for themselves, then start regulating and legislating once a consensus starts to form?

As an aside, I presume the great French appellations had determined the optimal wines to grow in their regions long before the regulations came around. On the other hand, if they had already come to a consensus, why regulate at all? Brand preservation? Because they could? (I think the regulations started under Napoleon, after all)