They're creating a cartel in the Napa Valley

We are all warned that the American economy is becoming more concentrated. There are fewer producers of any one thing, each of them thereby gaining more market power. It is this which explains the rise in the profit rate, the stagnation of the workers’ real wages. OK, I don’t buy the basic story as I’m, to put it mildly, entirely unconvinced that there is a stagnation in real wages – we’re not counting digital consumption properly. But, you know, let’s run with the story. So, here’s a lovely example of how that concentration happens, these calls for limitations upon the number of vineyards in the Napa Valley.

Another way to put this is to note Warren Buffett’s preference for a business with a moat. What he means is that both he and Berkshire Hathaway prefer to be in a business which has protection against competition. Less competition means that the consumer can be rooked a little more, raising profits. And the moat is the protection against that competition. That moat can come in many forms. See’s Candy has a brand name. Burlington Northern, well, no one’s ever again going to assemble the land rights to build a railway network in North America, are they? Geico is regulated at the state level, in 51 different ways (including DC) and an insurgent upstart has to overcome that – a decent enough moat.

To the vineyards:

Today Winiarski, 89, is speaking not of liberation, but of limits. A growing coalition of industry veterans and longtime residents fear that Napa has become a victim of its own success, pointing to the ecological transformation of the valley floor from dense oak woodland to a sea of vine-wrapped trellises. And they are posing a thorny question: has a unique agricultural region reached a tipping point at which agriculture itself becomes the threat?

“We’re not thinking ahead,” says Winiarski. “What’s at stake is a national treasure.”

Against this backdrop, a local environmental initiative has sparked fierce debate. The effort, known as Measure C, would cap the amount of oak woodland that could be cleared for future vineyards – in effect limiting the growth of some of the world’s most famous wine brands.

Hey, you never know, they might actually believe this guff. But then what people believe doesn’t change the economics of a matter. We can all believe that demand curves slope upwards, as many minimum wage proponents insist, but that doesn’t mean they do so.

The economics here being simple. Napa Valley is a brand. It’s possible to charge a premium for wine from the area. Just as being those few metres outside Bourdeaux, or inside it, makes rather a difference to what can be charged for the wine. So, the more people producing inside the area, claiming that brand premium, the lower the premium – other things being equal – is going to be. How do we protect that premium? We restrict the number of people who can claim the brand and the premium.

That is, whatever the environmental claims being made here this is simply the construction of a cartel – those who currently have Napa Valley land zoned for vines – to the benefit of the insiders and screw everyone else. The claims as to why make no difference to the economics at all.

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  1. Not sure this is a good example. The restriction is on the current brands growing, not preventing new entrants.

    Also if you were looking for industries which defy standard rules of supply and demand, the wine industry would be a good candidate. Some wines are Veblen goods, such as high end Champagnes, but with the added complication that brands become such more or less at random.

    Maintaining a high quality across a “brand” such as Nappa is everything. You don’t have to make particularly good wine — since most consumers can’t taste the difference — but you do have to have a good reputation.

    • how do you read that from it? I read it as that they want to stop any more vineyards in Napa. And OK, sure, those producers can go somewhere else to produce wine, but wine is a lot about the old terroir. That’s very good land for growing wine. If it were simply that they wanted to define Napa wines as only being in the current areas (like the Bordeaux example), that would be fine. The market would eventually figure that Cotes de Blaye and Navarra are often better value than Bordeaux and Rioja and adjust.

  2. Chester, the restriction is on both new entrants and expansion by those who share the existing monopoly. It will keep them from expanding their market, but will enforce their premium status and guarantee them high prices.

    But Measure C will not be enforced either by God or by the California judiciary, but by the county planning board, which the vintners attend regularly, more so than ordinary wine-drinkers anxious to listen to citations of chapter and verse. When a given oak forest needs to be rezoned, the owner will have ample justification, and might for a suitable donation even get the endorsement of the Sierra Club. In which case the restriction is only on new entrants. They don’t know how to play the game.

  3. I spend quite a bit of time in Sonoma County, just to the west and a premium wine region itself. There is a similar controversy, though the county is much larger. A lot of the people fighting vineyard expansion are not in the industry, though certainly those in the industry would benefit from the moat, though it would also constrain their ability to expand.

    Actually, a lot of smaller wineries are financially strapped. There’s a bit of a joke that it’s a pleasant way to dissipate a Silicon Valley fortune over the remainder of your life. Something like racehorses in that regard.

    These north bay counties are hotbeds of antidevelopment in any form whatsoever. Even after the fires that destroyed about 5,000 houses last fall there were people advocating that they should be replaced with apartments if they were to be replaced at all.

    Pretty part of the world though. Seriously thinking of retiring there.

  4. I have almost completely given up buying American wines, because it’s impossible to figure out which of the myriad of them are any good. None of price, label, producer or place of production seem to mean much.

    The real issue is sweetness – too damn sweet too often. When I want Kool-Aid, that’s what I’ll buy. It’s particularly annoying when the label describes the wine as “dry”.

    Whereas the quality of bottles of red from the Douro, Chianti or Bordeaux is usually predictably correlated with price.