Characteristics of the South Australian winegrape market are: many scattered growers, relatively few grape buyers (winemakers) , a perishable product and legislated prices for grapes. Because of the problems associated with grape pricing in Victoria and New South Wales, as well as in South Australia, the establishment of a free market for grapes was recommended in 1985 by a high level inquiry (McKay report). While the number of participants on both sides of the market may be sufficient for a free market, the lack of market information is likely to lead to a situation of high marketing risks for grape gravers due to widely dispersed prices. The scattered nature of grapegrowing makes search costs hiqh, accentuating price variability. Economic theory is drawn upon to highlight the potential for the use of market power when incomplete and costly information exists. Also, when this state exists supply and demand shocks cannot be perfectly arbitrated. Centralisation of information would increase the number of effective traders in the winegrape market, and results from experimental economics support centralisation and greater availability of information as factors reducing price risks in markets. The theory also suggests that the problem of 'white noise' may not be a serious problem in such a market. It is argued that centralisation of the winegrape market is best undertaken with the aid of computers due to the reduced costs of hardware and the availability of software to handle centralized marketing.
Faculty of Business staff papers, no. 33
Swinburne Institute of Technology
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