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Archive for February 19th, 2010

Robin Goldstein (author of The Wine Trials 2010) in the New York Times Opinion section, responds to some criticism regarding his position that high wine prices are often unjustified.

While certainly price and quality are not necessarily related, Mr. Goldstein shows a common ignorance of Economics in his argument for pricing wines based on the cost of production.

One might divide wine pricing theory into two rough schools of thought. There is the camp that believes wine should be priced from a supply-side/cost-plus perspective–you take the cost of production of the wine, you add reasonable costs and a modest profit for the producer, you factor in markups for distribution and retail, and you arrive at more or less what the wine should cost. The other camp believes that wine should be priced from a demand-side perspective–that a wine is worth whatever the market is willing to pay for it.

The reason I’m in the first camp, and not the second, is that I don’t subscribe to the neoclassical model of consumer rationality upon which the demand-side pricing theory is built, a counterfactual universe of stingily hypersensitive, quality-sniffing consumers. My sense is that, especially when it comes to hazy markets like wine, real human beings — within certain constraints — generally anchor themselves to market prices that are imposed upon them, and generally pay for things what they’re told those things are worth.

That there is a ‘first camp’ at all is an indicator to me that too many people don’t get enough (any?) exposure to fundamental Microeconomics.  You don’t need to take an advanced price theory course (although that was the most fun I had in a college course, with everything taught in terms of beer and pizza) to understand how prices are set. (more…)

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