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US-BASED RESEARCHERS Ginette McManus, Rajneesh Sharma and Ahmet Tezel have found there is money to be made in the wine auction business – as much as 20-30 per cent in as little as a few months. Provided you know what you are doing.

Are there any profitable trading strategies for wine buyers and sellers at wine auctions?

We think so based on our findings of price reversals for wine auctions held by The Chicago Wine Company published in November 2013 in the Journal of Wine Economics (which graciously gave us permission to write this condensed version of their article).

Using monthly wine price changes over the 1998-2008 time period, we find wines with strong declining prices experience significant price reversals in subsequent months.

The strongest reversals of 35-50 per cent occur after a decline of 30 per cent or more in wine auction prices over the previous month.

Weaker price reversals of about 10-12 per cent follow an increase in wine prices of 30 per cent or more over the previous two months.

Thus wine price declines after strong price increases are not, in general, as significant as wine price increases after strong price declines.

WINE AUCTIONS

We obtain wine auction prices from The Chicago Wine Company (TCWC) web site. TCWC follows the English auction model which is commonly used to sell wine and art (Ashenfelter, 1989).

An English auction, also known as an ascending price auction, starts with a low price for the item for sale (wines are sold in lots ranging from a single bottle to several cases) which is successively raised (either by the auctioneer or by the bidders themselves) until only one bidder remains and the auctioneer “hammers down” the item for sale.

Then, in most cases, the highest bidder pays the hammer price for the item if it is higher than the reserve price (the minimum selling price for the item which is generally not revealed to bidders to discourage collusive bidding). TCWC does not charge lotting fees, buy-in fees for unsold wines, and insurance fees.

While auctioneers typically receive a commission from both the buyer and the seller, TCWC does not charge a buyer’s premium, so successful bidders pay no more than the hammer price.  Marks (2009) finds auctioneer commissions paid by the buyer are reflected in the winning bids, resulting in lower proceeds to sellers.

The seller’s premium, expressed as a per centage of the hammer price, is negotiable and depends on the quantity and rarity of the wine being offered for sale.

TCWC does not advertise seller’s commission but reasonable estimates range from 15 to 25 per cent for wine.

Assuming a seller’s premium of 25 per cent and a hammer price of $100 for a lot of wine, the buyer will pay the auctioneer $100 (plus applicable state and local sale taxes and/or shipping fees and storage costs) and the seller will receive $75 (less shipping charges, if applicable) from the auctioneer.

AFTERNOON EFFECT

An interesting observation in wine auctions is the existence of the declining price anomaly (or the afternoon effect) documented in both theoretical and empirical research on sequential wine auctions.

The anomaly refers to the observation that when identical lots of wine are sold sequentially in a single auction, prices are more likely to decrease with later lots. This declining price anomaly is a violation of the “law of one price” and its existence in wine auction prices was confirmed in several empirical studies.

Ashenfelter (1989) suggests declining prices in repeated auctions is due to risk-averse bidders. If the price for the first lot of wine is equal to the later ones plus a risk premium, wine buyers may gain from not bidding too aggressively for early lots of a selected wine, as long as the winning bidder for the first lot of wine does not have the option to take all the other lots at the same price (Black and De Meza, 1992).

McAfee and Vincent (1993) show for risk aversion to be at the root of the declining price anomaly, bidders must exhibit non-decreasing absolute risk aversion, an attitude which is very unconventional among buyers.

More recently, Ginsburgh (1998) shows there is no anomaly in wine auctions as the price decline is due to absentee bidders who win the first lots using non-optimal bidding strategies. Finally, Ashta (2006) suggests there are so many economic, institutional and behavioral explanations to the observed declining prices in sequential wines auctions that maybe it isn’t an anomaly at all.

See February’s Grapegrower & Winemaker for the full story.

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