Market Structure and the Unintended Consequences of Quality-Related Innovations: The Use of Screwcaps on German Wines

More than 400 million bottles of wine of all qualities and prices are adversely affected by faulty cork closures each year; a problem that is especially dramatic when it afflicts expensive wines of high quality. The screwcap long offers a solution. Used on table wines since the 1930s, it eliminates cork-related defects and is also substantially cheaper than cork of high quality. A recent innovation, the long-skirted screwcap for premium wines, has been gaining market shares in Germany. In light of evident advantages over the fault-prone and expensive cork, it does not surprise that many makers of premium wines have embraced its use. But while each winemaker individually stands to benefit, widespread screwcap adoption on wines of high quality has the unintended consequence of legitimizing their use on wines of all qualities. And while makers of premium wines primarily stand to realize cost savings, makers of basic wines - who must currently resort to cheap closures of inferior quality - stand to substantially improve the organoleptic quality of their product. The adoption of the screwcap by makers of premium wines thus has as its unintended consequence that the overall quality of wines brought to market will increase - and with it, the competition that makers of premium wines experience.

In this paper, I present an empirically tractable model that captures this mechanism in terms of market competition on price and on quality. This model allows for explorations of how quality-related innovations such as the screwcap affect market structures and, as an unintended consequence, the economic incentives that markets offer their participants. Drawing on data on 35,000 wines made by 790 winemakers in Germany, I find empirical support of my hypothesis that while an innovation seems beneficial for the individual winemaker, its unintended consequences may negate this effect.