Freakonomics: When are High Wine Prices Justified?

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.

> 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.

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.

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.

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.

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?

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.

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.

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