Structural changes in the demand for wine in Canada

The purpose of this paper is to investigate structural changes in the elasticity of demand for wine in the Province of Ontario and in Canada as a whole. It will provide academic researchers and practitioners with a better understanding about structural changes in the levels of wine demand elasticities over time. It will also help the relevant governments and wine business establishments in developing taxation policy and business decisions.

The Kalman filter method, in conjunction with the Chow test, is applied to investigate structural changes in the elasticity of demand for wine. The Chow test is used for primary investigations of structural changes in the elasticity of demand for wine over time, whereas the Kalman filter method provides information about the behavior of the elasticity coefficients over time.

The Chow test reveals that structural changes in wine demand for Ontario are more pronounced than those for Canada as a whole. The Kalman filter results indicate that increased (decreased) government taxation could be an effective tool for discouraging (encouraging) consumption of wine. The analysis of own‐price elasticity suggests that the effects of increased government taxation on wine consumption be totally unexpected. Cross‐price elasticity coefficients change their signs over time, suggesting that some of the goods that are considered to be complements may become substitutes. Income and unemployment levels have different effects on wine consumption in Ontario and in Canada as a whole.

There may be variation in results by wine color (red or white), country of origin (imported or domestic), or price (premium or non‐premium).

Understanding changes in the elasticity of demand structure for wine over time would help policy makers at the provincial and federal levels come up with effective tools for controlling consumption of wine over time, including their taxation policies. For the wine business establishments, the information on consumer response is important for pricing purposes.

The Kalman filter has not previously been used to examine structural changes in the demand for wine in Canada.