A Premium for Wine

Here is a great posting from the Economist.com blog called Free Exchange, entitled Discover you dinner economist:

'RESTAURANT wine, as we all well know, goes for a bit more than wholesale. The markup on a bottle of wine from a restaurant's wine list might typically be anywhere between 50 and 500 percent. This state of affairs is the reason that "drink cross-subsidizes quality food," as Tyler Cowen notes, and the idea of a fine dining subsidy leads Ezra Klein to formulate an optimal dining out strategy. Namely, where wine markups appear to be high just eat and don't drink; the food should be a deal.

But why is it that restaurants are able to mark wine up to such a great extent? It could be that exclusive rights to the sale of alcohol within a restaurant limits competition, allowing proprieters to capture a larger portion of an alcohol buyer's consumer surplus relative to a high street retailer. This explanation is problematic, however, given the generally common practice of allowing diners to pay a corkage fee in order to bring in their own bottles. It's also possible that the range of drinks and vintages available, with varying prices and markups, allow restaurants to price discriminate, capturing more consumer surplus from their patrons in that way.

Stephen Dubner at the Freakonomics blog suspects that wine markups are possible because diners wish to signal certain positive attributes to their dining partners--either knowledge about wine or deep pockets, for instance. That certainly seems reasonable. I would add that the price quoted on a wine list includes not just the wine, but also an expertise premium. In other words, diners are paying for wine, but also for the knowledge that the wine they select will be good. When choosing a bottle in a wine shop, usually from a dizzying array of bottles hailing from regions scattered across the globe, a consumer either knows very little about the ultimate purchase, in which case there is a fair probability that one's relatively cheap wine will be bad or inappropriate given the situation, or the consumer knows a great deal, in which case he has invested time and energy into obtaining the knowledge necessary to get value for the money spent on a bottle.

By narrowing potential wine choices to a smaller, more manageable list and providing a server or sommelier to assist in decision-taking, a restaurateur adds considerable value to a bottle relative to its retail shop counterpart. Perhaps not enough to account for the entire markup, but definitely enough to encourage plenty of happy tipplers to swirl, sniff, and sip.'

SB