
Freakonomics: When are High Wine Prices Justified? - cwan
http://freakonomics.blogs.nytimes.com/2010/02/18/when-are-high-wine-prices-justified/
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jeff18
Cool article and informative anecdotes, and I ultimately agree that a $500 of
wine is overpriced but for different reasons. I can't agree with the article's
reasoning which is essentially: products should be priced based on how much
they cost to manufacture.

A couple counter examples: Apple computers and high-end cars.

A few more extreme counter examples, where the cost to "manufacture" is almost
$0: a $30 ebook, a web app subscription, or a top 10 iPhone app.

If you are going to say something should be priced based on the cost to
produce, I think you need to prove that it has been commoditized.

What I mean by that is that if there are, for example, one hundred different
pure gold nugget distributors, you should choose the cheapest, pure gold you
can find since it is all exactly the same. If you pay more than the base value
for your gold nugget, you are truly paying for nothing more than the
packaging, marketing, and other fees, since the end result is simply a pure
gold nugget.

So has wine been commoditized? That would be a more interesting article, and I
don't know the answer myself without doing more research. My grandfather
founded a famous California winery which actually holds its own against ye
olde European vineyards in many high profile taste-tests. He was an engineer
at SRI and produced wine with a scientific philosophy, happy to share his
"secrets" with anyone, so my guess is that he would agree. I'd love to ask him
his thoughts but sadly I can only speculate.

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pchristensen
Egad. Cost to produce = (Fixed cost / total units) + marginal cost. That's why
design-heavy items like software, music, books start out expensive and get
cheaper over time as the fixed cost is amortized, while "manufactured" items
like cars or wine are heavily dependent on marginal cost of each item.

For items where the cost per unit is dependent on marginal cost of each item,
it's 'fair' or 'efficient' if it is priced with a reasonable markup over the
marginal cost. Whether high prices that pay for marketing are justifiable is a
different discussion, because the heavily marketed product is arguable more
valuable to the customer because they don't have to take the time to discover
it.

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jeff18
Are you claiming that books, software, and other pieces of intellectual
property become cheaper over the years because the creator has finally
recouped his or her costs of the initial creation and benevolently decides to
give consumers a break on pricing?

Before I start explaining how I believe the economy actually works, I'd like
to make sure I understood you properly and you're not being sarcastic.

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pchristensen
Right effect, wrong explanation. IP products don't become cheaper because
creators magnanimously lower the prices, it's because they become _less
valuable_ because they've used up the market and are replaced by new products
from competitors and creators.

For instance, when people stop seeing movies for full price, they go to second
run or dollar theaters. Paperback books come out when hardback sales lag (note
- this is on a predicted schedule based on experience, not on real time
signals). Windows Vista costs a lot less than Windows 7 does right now, and
everyone has seen the disgusting bargain bins of DVDs for $5.

IP creators would happily charge high prices until the end of time but
competition prevents them from doing so. In circumstances where competition is
limited or markets have failed, they can do so for a long time. Windows +
Office is a good example - they're so embedded in people's and companies'
experience that they can't be commoditized, so they have maintained high
prices and profit margins for a generation.

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cabalamat
> _To me, when the consumer dollar is going more toward advertising than
> toward materials or production, it’s a paradigm case of overpricing. It
> bothers me that the mainstream wine media doesn’t take brands to task for
> this._

No doubt because much of the advertising is spent with the mainstream wine
media.

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tibbon
Replace Wine with Jewelry and you've got almost the same issue.

Consumers are unable to tell a synthetic diamond from a real one. They
couldn't tell you Tiffany's from something made locally, and the cost of
production has very little to do with the cost of the item. In short- spending
a ton is rarely justified and a lot goes into marketing.

A late friend of mine was a master jeweler for 30+ years and he made some
fantastic stuff that was often 1/4 the price of something that a 'big brand'
would have. His was handmade, unique, and often better made as well. He said
that most of the industry was a joke and to never buy jewelry from a major
retailer.

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byrneseyeview
If wine is just grape juice that gets you drunk, this makes sense. But wine is
also a signally mechanism. There should be a convenient way to say "I have
more money than I can possibly spend," and spending $5000 at a time on wine is
one way to do that.

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jrockway
Why wine and not water?

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loganfrederick
Water as well. Is bottled water that much better (however you want to define
that) than tap water put into any other container? There's a good deal of
marketing in the bottled water industry.

~~~
pchristensen
A large portion of the bottled water sold (2/3? can't find source) comes from
municipal tap water sources.

<http://today.msnbc.msn.com/id/5467759/>

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mattmaroon
This displays a clear lack of understanding of expected value. There is a
popular saying in the wine industry: "The best way to get a small fortune from
the wine industry is to start with a large one." Most producers of fine wines
lose money. Owning a winery is a badge of honor among the ultra wealthy, often
at the expense of being a terrible investment.

In any hits-driven business, like wines, there is a large risk. It's more akin
to starting a rock band than a traditional business. For every Screaming Eagle
there are hundreds of upstarts who can't even push bottles at $30.

It's not fair to evaluate the pricing of only the most successful. That's like
saying rock CDs cost too much because the Rolling Stones make billions off of
them. Sure, maybe, but overall the industry's profit margin is in line with
other industries with similar risks and opportunity costs. Since we live in a
free market, if it were not competition would spring up until it were.

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davidw
$30 is still a lot of money for a bottle of wine.

Heck, the wine they produce at the local agricultural high school isn't that
bad, and it goes for under 5 euros a bottle.

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dminor
At $30 though, I'd expect the wine to be quite good. At $10, I'd hope for it.

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ShabbyDoo
From my understanding of the methodology, I don't understand what conclusions
I could possibly draw from reading these reviews. My experience has been that
people who don't drink much wine tend to prefer sweeter whites over those more
dry. If you asked 500 of those people to compare a bunch of Chards in the
$15/bottle range, they would end up choosing the sweetest of the bunch. As
someone who drinks wine frequently, I would probably be upset if I paid $15
for those bottles. Like Netflix recommendations, I want to know which wines I
will likely find enjoyable.

How can this problem be solved? I want to know which wines are liked by people
who tend to like the same things I do. Could one do something like Netflix
recommendations for wine? Would every user have to be calibrated by a bunch of
blind tastings? Is there a more efficient proxy for calibration? Could a set
of small, unlabeled bottles be sent to one's home where each represents a wine
of a know, objective quality (oaked white, etc.)?

Unlike Netflix, I want to know if I'll like a $20 bottle more than another $15
one. It's not like movies are different prices, and we want to know if the $10
rental is sufficiently funnier than the $2 rental to justify the price
differential.

Is there some way to crowdsource good wine data?

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andrewcooke
the comparison with netflix is a little misleading, i think, because there's a
much clearer difference between films than their is between wines (famously,
people have rated white wine + dye as red wine with no problems).

pulling numbers out of my ass i would guess that grape variety, colour /
tannin content, sugar concentration and acidity would cover all you needed
_if_ context wasn't so important. but context _does_ dominate, so if you have
faith in the site you'll enjoy whatever it says it is good...

[actually, the more i think about this, the more i like the idea of something
like you suggest based _only_ on hard numbers for factors like i gave. if
nothing else, it would be a lot of fun following different trails...]

~~~
andrewcooke
oops: and % alcohol.

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necrecious
If you haven't read "Predictably Irrational," you should go out now and find
it.

In the book, it states that people have "price imprinting." That the first
price someone hears about a product will have dramatic impact on how he will
perceive future prices.

For example, the Apple iPhone. It came out at $599 and when people heard it
dropped to $399 then $199, they think it is a great deal, because they are
comparing against the high price they first heard.

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robryan
There has to be a demand aspect in the price because otherwise it wouldn't at
all be economic to sell aged wine. Scarcity becomes a big thing once there are
only a handful of bottles of something left.

The question is though, is what is coming out of those bottles any better than
the stuff you can buy cheaply? Being a predominantly beer and bourbon drinker
though I can't answer that.

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snippyhollow
When it's a good Bordeaux from 1985, 86, 88, 90.

