A recent study from Washington State University reveals that wineries known for producing “cult wines” could boost long-term profits through strategic scarcity pricing despite keeping their initial prices low. This generates excess demand, enhancing the brand’s prestige and future revenue prospects. The research, spearheaded by the university’s School of Economic Sciences (SES), focused on data relating to luxury, rare wines available only to those on a winery’s allocation list or through the secondary market, explicitly targeting wineries in Washington, Oregon, and California with complete allocation lists.

Jill McCluskey, a WSU Regents Professor and the director of SES, co-authored the study and shared her fascination with the high-cost cult wine market. She wondered why these wineries didn’t eliminate their allocation lists by raising the prices of their high-quality products. “As an economist, the reasons behind their pricing strategies, which seemed to be optimised for maximising profits over time, were particularly fascinating to me,” she noted. The study found that pricing cult wines below the market equilibrium—where supply meets demand—increased demand due to the perceived scarcity among consumers.

Although this scarcity-pricing strategy didn’t maximise profits in the short term, it effectively increased demand for cult wines in the long run. More consumers were willing to purchase these wines at higher prices in the future, significantly increasing revenue for the winemakers. Ron Mittelhammer, another SES Regents Professor and co-author of the study, emphasised the importance of understanding market dynamics, particularly in nonstandard markets like cult wines. “Our findings provide a sound economic basis for the pricing strategies employed by some cult wine producers, which might otherwise be deemed unconventional and potentially subject to regulatory scrutiny,” he explained.

McCluskey pointed out that scarcity pricing principles apply to various other markets, including limited-edition whiskies, tickets for victorious sports teams, or popular restaurants that are hard to book. She emphasised that the key factor is the high quality of the product. “While this research can guide cult wine producers in their pricing strategies, scarcity pricing wouldn’t necessarily benefit all products or services,” she added. The study also explored the role of the secondary market, where cult wines are often resold at prices significantly higher than their initial release prices. Although secondary market sellers gain short-term profits, wineries benefit from the increased demand.

“We examined the price wedge—the difference between the secondary market price and the release price for those on the allocation list,” McCluskey explained. “Our findings indicated that the larger this price difference, the more demand increases over time, pushing up the secondary market prices the following year.” As secondary market prices rise, wineries are likely to adjust the release prices of their cult wines upwards in subsequent periods. However, to maintain the effectiveness of the scarcity-pricing strategy, winemakers need to ensure that their prices continue to foster excess demand.

McCluskey, who has a long-standing interest in the economics of the wine industry, including studies on sustainability labels and their impact on consumer demand, expressed her ongoing fascination with wine as a product linked to place and differentiation. She highlighted her plans to explore various consumer behaviours further and their implications for the wine industry, especially in light of current challenges such as health preferences, environmental factors, and the impacts of cannabis legalisation on wine demand.

More information: Jill McCluskey et al, Underpricing and perceived scarcity, Journal of Economic Behavior & Organization. DOI: 10.1016/j.jebo.2024.106873

Journal information: Journal of Economic Behavior & Organization Provided by Washington State University