Applied Economics Letters, 2015

Vol. 22, No. 17, 13551360, http://dx.doi.org/10.1080/13504851.2015.1031866

The demand for Turkish wine:

estimates of the wine price
elasticities

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Durmu zdemir
Department of Economics, Yaar University, niversite Caddesi,
No: 37-39, Bornova, zmir, Turkey
E-mail: durmus.ozdemir@yasar.edu.tr

This article examines the impacts of the recent high taxation policy on
Anatolian wine demand and wine price elasticities. This article uses quarterly data between 1997 and 2013 to estimate key elasticities of the Turkish
demand for wine. No prior study has estimated specic elasticities for wine
consumption and the results also indicate that the high taxation policy is
signicantly reducing the wine demand and production in Turkey.
Keywords: wine taxes; Turkey; demand elasticity
JEL Classication: L66; D4; E62; M2
I. Introduction
Turkey ranks fth in the world regarding the acreage
devoted to vines and sixth in terms of the grape
tonnage harvested, but is virtually nowhere to be
found on the lists of top wine-producing countries.
Anatolian wine production has a very long history
of vineyard cultivation, and wine production dates
back to the pre-Hittites, who lived in Anatolia
between 3000 and 4000 BC (Gorny, 2003; Powell,
2003). In fact, the earliest records of Anatolian wine
date as far back as the Neolithic period, which started
10 200 years ago. Atalay and Hastorf (2006) have
shown that traces of fermentation of fruit, which was
likely to include grapes, can be found in atalhyk,
a 9500-year-old Neolithic site located in southcentral Turkey. It has been argued that Anatolia
(Asia Minor) is the motherland of vineyards and
wine. This fascinating trend in wine production

history has received a serious impediment by the

incumbent governments high taxation policy in the
last decade. Gumus and Gumus (2008) investigated
the problems of the wine sector. Their research result
emphasized that the most important problems of
Turkish wine production are high consumption
taxes, an unregistered economy and a lack of support
from the government. For example, as a result of
excessive olive production support in the northwest
of the wine-growing region in Turkey, vineyards
were uprooted in favour of young olive trees. The
number of olive trees has increased from 75 000 to
350 000, and this has been determined to be a development in opposition to vineyards between 1993 and
1997 (Gngr and Gngr, 2003). This is due not
only to the subsidy for alternative agricultural production but also to the sequence of high consumption
taxes introduced after August 2002. The rst consumption tax on wine consisted of 48.7% imposed

2015 Taylor & Francis

1355

 zdemir
D. O

1356
.5

.5

Quantity

.4

.4

.3

.3

.2

.2

.1

.1

.0

.0
1998

2000

2002

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SVPC

2004

2006
SQPC

2008

2010

2012

PQPC

Fig. 1. As the per capita wine production (PQPC)

and the per capita quantity of wine sales (SQPC)
decline, the per capita wine sale values including
taxes (SVPC) increases
Source: TK quarterly seasonally adjusted data,
19972014. The quantity is in litres.

on table wine and 212% on sparkling wine.

Following the rst tax imposition, the tax rate changed ve times in the following 3 years. It was then
nalized as a 63.3% private consumption tax on bulk
wine and 275.6% on sparkling wine. It was also
added that the wine has to have a xed minimum
price of 3.28 TL/lt (1.8 euro) for bulk wine and
11.212 TL (6.2 euro) for sparkling wine and all
other wines (Gumus and Gumus, 2008).1 In fact,
these amendments almost doubled the wine prices
in 2005. The basic bulk wine price rose from 5 TL to
10 TL in 2005. The increase in price reduced the bulk
wine quantity sold from (Q1; in the rst quarter) 92
795 123 l to (Q2; second quarter) 82 391 164 l from
2005 to 2006, according to the Turkstat data source
(a decrease of 10 403 959 l).
It is also clear that as the quantity of wine production and sales declines2 the sales value (including
taxes) of wine increases (Fig. 1).
This research investigates the impact of the recent
high taxation policy in Anatolian wine demand and
estimates of the long-run price, cross-price and
income elasticities for wine demand.
This article is organized as follows. Section II
summarizes the Turkish markets for alcoholic beverages and outlines the empirical model specications. Section II provides the empirical results. The
article ends with some concluding remarks.
1
2

For a detailed review, see Gumus and Gumus (2008).

Advertising wine also became strictly forbidden by law.

II. Data and Taxation in Turkish Alcoholic

Beverages
The three alcoholic beverages that have the largest
consumption in Turkey are wine, rak and beer. Rak,
which is made of grapes with aniseed fermentation
and distillation, is considered to be the national drink
and is very popular (zdemir, 2013). Beer and rak
are included in this analysis because they may be the
main substitutes for wine. The high taxation policy
of the government applies to all alcohol types but the
quantity of taxation varies. There are also three different types of taxes on alcoholic beverages. Two of
these are special consumption taxes (SCTs), which
are charged to the producer during the stage of production before the products enter the market for sale.
The rst form is a lump sum tax and the second form
is a tax charged on the percentage cost of production
value. Further, 18% VAT is added to the retail price.
The implementation of SCTs started to be applied in
Turkey in August 2002.
At rst, it was agreed that a tax rate of 48.7%
would be imposed on fresh grape wine and a tax
rate of 212% for sparkling wine. Within the rst
three years of implementation, the SCT rate changed
ve times (Gumus and Gumus, 2008). The SCT was
63% at the end of 2002. However, following amendments, minimum xed prices, which were not
included at rst, were determined. Moreover, the
value determined according to the announced rates
could not be below 3.28 TL/Lt in 2006. Taxes on
wine were amended more than 10 times between
2003 and 2013 in Turkey.
When new taxes are imposed on wine, tax
increases are also imposed on beer and rak but in
different quantities. For example, while a tax rate of
63% on beer was introduced in 2006, at the same
time the per litre tax of 3.28 Tl was reduced to
0.26 TL.
Rak has the highest taxation of these three beverages followed by wine. Currently, wine has a 3.97
TL per bottle production tax imposed when it is
bottled. The 18% VAT added on that amount is thus
a tax on taxes. The price calculation for wine, as an
example, is shown in Table 1. The value for total cost
is assumed to be xed at 2002 prices, which are taken
from the tax councils calculations. A similar price
calculation for beer and rak is also carried out.

The demand for Turkish wine

1357

Table 1. Price of a bottle of wine (2002 xed prices)

after two levels of lump sum taxes
Table wine TL

Tax1

Tax2

Cork
Label
Cap
Wine
Labour
Transport
Depreciation
Total costs
Market sale price
Lump sum tax (TV)
Total
% 18 VAT
Total sale price
Retail prot (2030%)
Suggested sale price

0.06
0.03
0.02
0.4
0.9
0.1
0.1
1.61
2.50
1.75
4.25
0.77
5.02
1.06
6.27

0.06
0.03
0.02
0.4
0.9
0.1
0.1
1.61
2.50
3.28
5.78
1.05
6.83
1.71
8.54

.16

Quantities

.14

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.12

Source: Turkish Ministry of Finance, tax council report

and own calculations.
Notes: The lump sum tax is an SCT regardless of the prot
obtained from the sale. It is charged as a xed sum per
bottle regardless of the quality of wine. More expensive
wine is charged the same amount of tax as cheaper wine.

140

Per Litre price

120
100
80
60
40
20

.10
.08
.06
.04
1998

2000

2002

2004
PQPC

2006

2008

2010

2012

SQPC

Fig. 3. The implementation method of SCT is causing

a strong correlation between per capita wine production (PQPC) and per capita sales (SQPC)

increase caused by tax was observed in 2002 for all

three beverages. High beer taxes were moderated
after 2009. Wine taxes remained almost the same
after 2002. Taxes on rak gradually increased
throughout the sample period.
The main tax-imposing years were 2002, 2005,
2011 and 2013. The impact of taxes on wine sales
and production can be seen in Fig. 3, which clearly
shows that per capita wine production and consumption are highly correlated.
One of the reasons for this correlation stems from
the implementation method of production tax.
Producers bottle wine only if they receive demand
from retailers. Bottling means that they have to pay
tax. If there is no retail demand, statistically, there is
no declared production.

0
1998

2000

2002

2004
WP

2006
RP

2008

2010

2012

BP

Fig. 2. The impact of alcohol taxes on the price of the

three main beverages; wine price (WP), beer price
(BP) and rak price (RP).
Source: Ofcial gazette and own calculations.

Figure 2 shows the impact of alcohol taxes on the

per litre prices of the three main beverages. Cost
without tax is assumed to be xed and 2002 values
are used throughout the period. The price is assumed
to be affected by taxes only. This proxy of prices is
made for two reasons: retail price data are not available and the impact of tax changes can be observed
by using this real price method. The largest price

III. Model, Data and Empirical

Specifications
A number of studies have been conducted in the area
of estimation of alcohol elasticity. The impact of
changes in prices of alcoholic beverages on alcohol
consumption has been more extensively studied than
any other potential alcohol policy measure
(Anderson and Baumberg, 2006). sterberg (2011)
was one of the recent studies in the area and concluded that the importance of alcohol taxes as an
alcohol control measure has decreased as the real
value of alcohol excise duty rates has decreased in
most EU countries during the last decades. There are
also a few meta-analyses of the effects of changes in
alcohol prices and taxes on drinking. Wagenaar et al.

 zdemir
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1358
(2009), based on 112 studies, claimed that price
elasticities are not inherent properties of alcoholic
beverages. Their estimated own price elasticities for
all alcoholic beverages were 0.51. The few previous studies of alcohol consumption have tended
to focus upon analysing aggregate alcohol sales
across all beverages (e.g. McGuinness, 1980; Salisu
and Balasubramanyam, 1997; Gallet, 1999;
Mangeloja and Pehkonen, 2009). Tomlinson and
Branston (2014) focused on the estimates of the
long-run price, cross-price and income elasticities
for alcoholic beverages. This study adopts a similar
methodology as they adopted but differently estimates the long-run price and income elasticities for
Turkish wine consumption.
Although the high taxation period started in 2002,
the study uses 64 samples of quarterly data between
1997 and 2013. It uses two different methods. The

rst estimation method implemented is maximum

likelihood. SEs are cross-checked by using bootstrapping to make sure reliable results are obtained.
The second method is a standard time series OLS.
In order to assess the statistical signicance of the
taxs impact on wine production and sales, rstly, a
dummy variable is introduced for those years in the
rst estimation method. In our tax effect regression,
we rstly t regression models with per capita consumption of wine in year t (PCWC) as the dependent
variable and Tax.sc1 as the independent variable:
PCWCt 0 1 Tax:sc1 t

(1)

The results from the regression described in

Equation 1, run using data for Turkey between
1997 and 2013, are presented in Table 2.3 For a

Table 2. Comparative summary of the estimations

Variables

Symbol

(1)

(2)

(3)

Dependent variable: Per

capita wine consumption

QD (SQPC
for 3 and 4)

Equation 1 Tax
Dummy 1 Coeff.

Equation 2 Tax
Dummy2 Coeff.

Equation 5
Equation 3 Equation 4 Coeff.

Independent variables:
Constant

cons

31066.1

28534.1

Tax dummy 1
Tax dummy 2
Tax dummy 2002Q3

Tax.sc.1
Tax.sc.2

5697.6

Wine price

RPW

Beer price

RPB

Rak price

RPR

Per capita disposable

income
Log of wine price

DI

Log of beer price

LRPB

Log of raki price

LRPR

LRPW

R
R2
Log of per capita disposable LDI
income

4749.04

0.10
(7.04)

(4)

2.05
(0.73)

0.006
0.07
(7.038) (3.31)
0.0024
(2.093)
0.0003
(0.61)
0.0003
(1.90)
0.00009
(0.10)
0.53
(2.68)
0.001
(0.03)
0.25
(2.92)
0.57
0.006
(0.004)

(5)

2.15
(21.17)
0.06
(3.41)

0.53
(5.47)
0.25
(4.93)
0.52

Computationally, for Equations 1 and 2, the statistical software environment R (R Core Team, 2013) was used to t the
data. The estimation method implemented was maximum likelihood. SEs were cross-checked by using bootstrapping to
make sure reliable results were obtained.
3

The demand for Turkish wine

1359

second taxation period, we examine the following

regression and the second dummy employs the taxchanging periods 20052008 and 2013 as presented
in Table 2:
PCWCt 0 1 Tax:sc2 t

(2)

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The third and fourth methods (OLS) include the

possible substitute product prices, which are rak and
beer for the same period and the disposable income.4
PCWC t 0 1RPW t 2RPBt
3RPRt 4DI t
5TaxD2002 t

(3)

where PCWC denotes per capita wine consumption

in litres, RPW real price of wine, RPB real price of
beer and RPR real price of rak. DI is the disposable
per capita income and TaxD2002 is a dummy variable for the largest tax-raising year. All variables are
rst estimated in nonlogarithmic terms in Equation
3 form than they estimated in logarithmic terms
with the use of the OLS method. Table 2 shows
the estimated results of Equations 3 and 4. The
beer price does not seem to have a statistically
signicant impact on wine sales, while the price of
wine has a statistically signicant impact on wine
sales and, as predicted, rak price has a signicant
impact on wine sales. When rak prices increase,
wine consumption also increases. As Salisu and
Balasubramanyam (1997) found for beer and spirits, this study found that wine and rak are substitutes in Turkey.
Equation 4 introduces a logarithmic process into
the regression, but the implemented Chow test shows
that the structural break at the end of 2002 is signicant. Summary results are presented in Table 2.
LogPCWC t 0 1 logRPW t
2 logRPBt
3 logRPRt
4 logDI t
5TaxD2002 t

(4)

The nal estimated regression equation is

Equation 5. There is a structural break in the fourth
quarter of 2002. The results are presented in the fth
column of Table 2. The Granger causality test shows
that wine prices Granger cause wine demand.
LogPCWC t 0 1logRPW t
2D2002Q4
3logRPRt t

(5)

An increase in wine prices signicantly reduces

wine consumption as a proxy for wine demand. As
explained previously, wine sales are highly correlated with wine production. Thus, the impact of
high taxes on wine production is signicant.
Although the elasticities differ between pre-2002
and post-2002, the price elasticity of demand was
0.53 after the high taxation introduced. With
respect to the cross-price elasticities, only the price
of rak enters the equation signicantly. Cross-price
elasticity between wine and rak is 0.25. The demand
for wine is income inelastic and 0.0068. Income
elasticity is not signicantly differing from zero. The
results are interesting to show what happens to elasticities under simultaneous tax increase on all alcoholic beverages.6
IV. Concluding Comments
Both the data on Turkish wine consumption and the
estimated new price and cross-price elasticities for
wine sales reect falling overall wine sales. A high
taxation policy is good for increasing the short-run
government revenues, but this claim is no longer
valid for the long run. The tax increases of last
decades are reducing the wine demand and consumption signicantly in Turkey. Wine demand and consumption is highly correlated with wine production,
thus the production also gradually decreases.
Thus, the export policy in the wine sector should be
encouraged. The foreign trade statistics7 of recent
years conrm that the exports have declined while
the imports have increased. Thus, the high taxation
policy (including exports) is increasing the imports

Unlike McGuinness (1980) and Tomlinson and Branston (2014) real advertising expenditures are not included because
alcoholic beverage advertisement is forbidden by law in Turkey. There is also no reliable available data on alcohol licences.
5
A standard least-squares estimation was carried out for quarterly data between 1997 and 2013.
6
Turkish policymakers are introducing a simultaneous tax increase on all alcoholic beverages.
7
Although the international wine trade started in the recent years, the volume of this trade is very small.

1360
and beginning to contribute to the trade decit of the
country. This result partially originates from the contribution of high taxes to the domestic production and
liberalization of the wine trade. A possible suggested
policy is to remove the SCT from Turkish wine
exports and encourage export-oriented wine to start.

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