Is the Second-Cheapest Wine a Rip-Off? Economics vs. Psychology in Product-Line Pricing

David de Meza and Vikram Pathania

No 321852, Working Papers from American Association of Wine Economists

Abstract: The standard economic analysis of product-line pricing by Mussa and Rosen (1978) implies that higher-quality varieties command higher absolute mark-ups. It is widely claimed that this property does not apply to wine lists. Restaurateurs are believed to overprice the second-cheapest wine to exploit naïve diners embarrassed to choose the cheapest option. This paper investigates which view is correct. We find that the mark-up on the second cheapest wine is significantly below that on the four next more expensive wines. It is an urban myth that the second-cheapest wine is an especially bad buy. Percentage mark-ups are highest on mid-range wines. This is consistent with the profit-maximising pricing of a vertically differentiated product line with no behavioral elements, although other factors may contribute to the price pattern.

Keywords: Demand and Price Analysis; Consumer/Household Economics (search for similar items in EconPapers)
Pages: 27
Date: 2021
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:aawewp:321852

DOI: 10.22004/ag.econ.321852

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