Monday, June 27, 2016

The cost of luxury wines

In the previous post (Luxury wines and the relationship of quality to price) I discussed the concept that luxury wines do not fit into the "normal" price structure. There are thus two independent concepts of "price" for wines, and these have different relationships to quality. Indeed, luxury wines are more of a commodity than a drink — they are traded as investments rather than drunk as a beverage.

The dataset used in that post had only had a few luxury wines, and so I could not examine how price varies among the luxury wines, only among the "normal" wines. In order to look at the luxury wines I need a bigger list of such wines — that is, we need to have a list of the world's most expensive wines.

One possible source of that is the list provided by the Wine-Searcher site of The World's Top 50 Most Expensive Wines. Here, I will use the list updated on 1 June 2016.

The web site describes the list this way:
The list is based on the average price of a standard bottle (750 ml). To be included in the list, a wine must have at least 10 offers spanning at least four vintages, two of which must have been in the last 10 years.
The data are shown in the graph (click it for the full image).

The world's 50 most expensive wines 2016

Of the 50 wines in the list, 39 are from France, with 34 being from Burgundy (shown in red in the graph). Of the remaining five French wines, two are from Pomerol (Bordeaux) and three are from Champagne. Of the 11 non-French wines, nine are from Germany (mostly trockenbeerenauslese, the sweetest type of wine), one is from the USA (a Napa Valley cabernet sauvignon), and one from the Ukraine (a port style).

That Burgundy wines dominate this list is well know, as is the most likely cause. Unlike most vineyard regions (notably those of Bordeaux), the vineyards of Burgundy are intricately subdivided, based on the local terroir (soil and climate conditions), with many named climats (or lieux dits). This means that each wine is slightly different, and they are also in limited supply. Basic economic theory indicates that under these circumstances the prices can become outrageous. In general, Burgundy wines will never be good value for money.

Domaine de la Romanee-Conti Romanee-Conti Grand Cru
Of particular interest for this post, though, is that the prices clearly fit an exponential (or log-linear) model. The correlation coefficient for the rank order of the wines with the logarithm of the price is –0.915 (the coefficient of determination is 84%), which is a very good fit of the data to this simple economic model.

So, we now know that the prices of both "ordinary" wines and "luxury" wines fit the same type of economic model (exponential), but the details of that model vary dramatically between these wines. That is, for both wine types the price increases in a multiplicative manner, and the multiplier itself also increases. (See the post The relationship of wine quality to price.) However, the "base" price is very different between these wine types, and the multiplier is also different.

You and I may never be able to buy the luxury wines, but at least we know that the rich must also think their wine prices go up pretty steeply — US$ 13,000 is a lot to ask for a bottle of flavoured alcohol!

1 comment:

  1. On the subject of luxury goods pricing, consider these economic phenomena:

    Veblen goods –

    [Excerpt: “Some types of luxury goods, such as high-end wines, designer handbags, and luxury cars, are Veblen goods, in that decreasing their prices decreases people's preference for buying them because they are no longer perceived as exclusive or high-status products.”]

    Giffen goods –

    [Excerpt: “Some types of premium goods (such as expensive French wines, or celebrity-endorsed perfumes) are sometimes claimed to be Giffen goods. It is claimed that lowering the price of these high status goods can decrease demand because they are no longer perceived as exclusive or high status products.”]