Price, critics and quality
A few weeks ago an interesting experiment was undertaken at the Brussels food fair, a yearly affair where food lovers wander around among the many stalls stuffed with all imaginable delicacies. A stall was put up selling boxes of Belgian chocolates. The first day the price was set at Euros 9 for each box. Sales went well. The next day the price was raised to Euros 15 per box. Steeped in economic theory, you might think that demand now declined. Wrong. Demand doubled. On the third day the price was lowered to Euros 2 for each box. Demand for chocolates collapsed. What went wrong with the law of demand?
The explanation is given by psychologists. It is very difficult, if not impossible, for the consumer to find out the quality of chocolates by just looking at their appearance in the shop. When confronted with such uncertainty about the intrinsic value of things, consumers use simple rules of thumb that they understand. Psychologists call these “heuristics”. In this case, the price of the chocolates provides the rule of thumb.
Most consumers have some experience that allows them to associate high price with high quality. It is not always like that, but on average it probably is. Thus when looking at the Euros 15 box the consumers infer that the high price reflects high quality and they buy the chocolates. Consumers who see the boxes priced at Euros 2 infer that the quality of these chocolates is not to be trusted, and they do not buy them. The law of demand is turned upside down.
So writes Paul de Grauwe in today’s Financial Times. Though he was relating the Belgian chocolates example to the strength of the US dollar, it doesn’t take much for a wine enthusiast to relate the example to wine. Price is not a reliable indicator of quality in wine (as much as wineries would like it) as my value vino picks demonstrate.
When price fails, wine consumers often turn to critics for indicators on quality. This is something we will be discussing in my critics class, starting next month. Critical reviews too can be deceiving since palates vary and a simple numerical rating is so spare that it doesn’t convey food pairings or flavor profiles. The good thing about wine is that it’s not that hard to determine the quality yourself–just pull the cork!
On January 15th, 2006 at 11:31 am ,Joanne wrote:
Wow! What an interesting little study! It would correlate specifically with a type of industry where the consumer is looking for quality first rather than value. Gourmet food is certainly one of those categories.
On January 16th, 2006 at 8:43 pm ,Randy wrote:
Hmmm! I don’t think this works on wine drinkers, especially here in Minnesota. All the wine drinkers I know are all about gaming the system. Finding the fabulous trophy wine that flys below the radar screen is what they are all about.
On January 17th, 2006 at 9:16 pm ,Dr. Vino wrote:
Randy,
How do you decide which wines to buy–price, critical reviews, or trial and error?