Reputational Effects on Third-Party Agents : A Study of the Market for Fine and Rare Wines

We examine the effectiveness of a quality assurance mechanism that relies on a third-party's reputation. We focus on the market for fine and rare wines where auction houses intermediating between sellers and buyers have also claimed expertise to assess product authenticity. An auction house's reputation can sustain product quality in this market only if consumers absorb relevant information and punish houses who fail at screening out counterfeits. We test the existence of such reputational effects by studying the market responses to two disclosures of houses having auctioned fake wine. We find that one house experienced negligible losses after a 2008 event involving a limited number of counterfeit bottles. However, three houses associated with a 2012 incident involving thousands of bottles are found to have suffered reputational losses. These losses are demonstrated over the following year by an average 4.5% decrease in equilibrium sales prices of all wines, and a slight decrease in sales quantities of older wines, relative to other houses