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Friday, September 04, 2009

Cost and Experience

Yesterday I hypothesized that price plays a role in how consumers feel about high-end beer. It prompted a reader to send me the results of a 2007 study that tested this same hypothesis among wine drinkers. Upshot? Price definitely affects appreciation:
We tested this hypothesis by scanning human subjects using functional MRI while they tasted wines that, contrary to reality, they believed to be different and sold at different prices. Our results show that increasing the price of a wine increases subjective reports of flavor pleasantness as well as blood-oxygen-level-dependent activity in medial orbitofrontal cortex, an area that is widely thought to encode for experienced pleasantness during experiential tasks.
While I'm feeling a little sheepish about the experiment I suggested yesterday (a market-based model dependent on a beer company), this does lend credence to the original hypothesis. The study model was fascinating. First, they asked people to taste the same wines and told them they were different and cost different amounts ("reported pleasantness was correlated with wine prices"). Eight weeks later, they had them taste all the same wines blindly, with no information ("ss expected, in this case, there were no reported differences among the wines").

Two interesting side notes. The researchers acknowledge one confounding factor: the test subjects may have been influenced in their opinion of the wines by the scientists conducting the experiment, "deeming it inappropriate to report to the experimenter that a cheaper wine tastes better." And yet they also found in the brain scans a mechanism analogous to the one observed in the placebo affect--suggesting that the subjects actually experienced the wine as better.

The paper concludes with these thoughts, which I also find interesting:
We show that, contrary to the standard economic view, EP [experienced pleasantness] depends on nonintrinsic properties of products, such as the price at which they are sold. It then follows that marketing manipulations might affect subjective perceptions of well being. This raises several difficult questions for the field. Should the effect of prices on experienced utility be counted as real economic well being or as a mistake made by individuals? To what extent are measurable differences in preferences based on intrinsic differences between products and price effects we have identified? What happens to the efficiency of competitive markets when firms can influence experienced utility by changing the price of items?
In other words, what happens if everyone jacks up the price of their beer to $20 a bottle? Would it damage the overall high-end market? (It raises a related question in my mind. Why don't breweries charge different amounts for their own beer based on cost, availability, and subjective factors like tastiness? I assume it's because they don't want to damage sales of other products, but I nevertheless wonder.)

The full pdf is here if you'd like to read it.


  1. As an economist I don't think this contrasts economic theory. What I think is that in equilibrium, market price is generally equated with quality and thus consumers make the simplifying assumption that price is a good signal of quality. Interestingly, this should be more true in beer (where once you have tasted a Rogue Brutal Bitter, you pretty much know the quality) than in wine where the character of a certain vineyards Pinot may change radically from year to year. Perhaps this is why, in wine markets, price is a much less reliable indicator of quality. This, therefore, may be also true of specialty beers that have no track record and may be precisely why we see such variation in price.


    "Individuals who are unaware of the price do not derive more enjoyment from more expensive wine. In a sample of more than 6,000 blind tastings, we find that the correlation between price
    and overall rating is small and negative, suggesting that individuals on average enjoy more
    expensive wines slightly less. For individuals with wine training, however, we find indications of a
    non-negative relationship between price and enjoyment. Our results are robust to the inclusion of
    individual fixed effects, and are not driven by outliers: when omitting the top and bottom deciles
    of the price distribution, our qualitative results are strengthened, and the statistical significance is improved further. These findings suggest that non-expert wine consumers should not anticipate greater enjoyment of the intrinsic qualities of a wine simply because it is expensive or is appreciated
    by experts."