WSU Study Looks At How Scarcity Can Help Wineries

According to a new study by Washington State University, when a product is hard to buy, more people want it.  WSU’s research indicates that wineries producing “cult wines” can boost long-term profits by keeping their prices low, creating excess demand that fuels their brand’s prestige and future revenue.  The study, published in the Journal of Economic Behavior & Organization, focused solely on Washington, Oregon and California wineries with full allocation lists.  The researchers found that when the wineries offered their cult wines below market equilibrium price — the point where market supply equals demand — more people wanted to buy them.  This caused demand to outweigh supply, resulting in perceived scarcity among consumers. 

“The high-cost cult wine market is very intriguing,” said study co-author Jill McCluskey, WSU Regents Professor and SES director. “As an economist, I wondered why these wineries didn’t eliminate their allocation lists by raising the prices of their high-quality products. I knew there was a reason, and that it had to be profit-maximizing over time.”

While this “scarcity-pricing” strategy was not profit-maximizing for wineries in the short term, the study demonstrated that it increased demand for cult wines in the long run, meaning more people would be willing to buy the product even at a higher price.  

“It’s important for consumers, producers, and policymakers to understand how markets work, especially when they are somewhat nonstandard,” said Ron Mittelhammer, study co-author and SES Regents Professor. “Our research provides a defensible economic rationale for the pricing behavior that is used by some cult wine producers. This behavior might otherwise appear unusual and potentially in need of investigation by market regulators.”

Scarcity pricing is applicable to other markets like limited-edition whiskeys, tickets for a winning sports team, or a popular restaurant where it’s challenging to secure a reservation, according to McCluskey. In each scenario, consumers desire a high-value product or experience that is limited in supply.

“What’s important is that the product is high quality,” she said. “While cult wine producers can use this research to inform their pricing strategies, not everyone would benefit from scarcity pricing.”

“We looked at the price wedge, which is the difference between the secondary market price and the release price paid by those on the allocation list,” McCluskey said. “We wanted to see how the price wedge shifted the price of the wines during the next period. We also found that the bigger that price difference is, the more the demand shifts out over time.”

Click Here to check out WSU's research.

If you have a story idea for the PNW Ag Network, call (509) 547-1618, or e-mail glenn.vaagen@townsquaremedia.com