Vertical differentiation via multi-tier geographical indications and the consumer perception of quality: The case of Chianti wines

We derive and estimate a model of demand for Geographical Indications allowing for subjective and heterogeneous quality perceptions, and study vertical differentiation based on multi-tier quality labels within the context of the strategy adopted by the Chianti Consortium. Quality perceptions and wine choices are elicited in an online experiment where the number of quality tiers is augmented incrementally in a between-subject design. The empirical model includes subjective quality perceptions as an (endogenous) explanatory variable, and unexplained heterogeneity in WTP for quality as a random parameter. We find that quality perceptions are endogenous to the labeling regime, and adding a high-quality label (Chianti Classico Gran Selezione) decreases the perceived quality of all other Chianti wines, but not the competitor wines. However, the market shared lost to perception restructuring is small compared to the benefits of increased vertical differentiation.