New WSU study shows how scarcity pricing helps 'cult wineries' drive demand

(Press-News.org) PULLMAN, Wash. — When a product is hard to buy, more people want it. A new Washington State University study reveals that wineries producing “cult wines” can boost long-term profits by keeping their prices low, creating excess demand that fuels their brand’s prestige and future revenue.

Economists in WSU’s School of Economic Sciences (SES) analyzed data on cult wines: rare, luxury bottles only available to consumers who secure a spot on a winery’s allocation list or purchase the product via the secondary market. The study, published in the Journal of Economic Behavior & Organization, focused solely on Washington, Oregon and California wineries with full allocation lists. 

“The high-cost cult wine market is very intriguing,” said study co-author Jill McCluskey, WSU Regents Professor and SES director. “As an economist, I wondered why these wineries didn’t eliminate their allocation lists by raising the prices of their high-quality products. I knew there was a reason, and that it had to be profit-maximizing over time.”

The researchers found that when the wineries offered their cult wines below market equilibrium price — the point where market supply equals demand — more people wanted to buy them. This caused demand to outweigh supply, resulting in perceived scarcity among consumers.

While this “scarcity-pricing” strategy was not profit-maximizing for wineries in the short term, the study demonstrated that it increased demand for cult wines in the long run, meaning more people would be willing to buy the product even at a higher price. That combination of excess demand and higher prices led to increased revenue for winemakers.

“It’s important for consumers, producers, and policymakers to understand how markets work, especially when they are somewhat nonstandard,” said Ron Mittelhammer, study co-author and SES Regents Professor. “Our research provides a defensible economic rationale for the pricing behavior that is used by some cult wine producers. This behavior might otherwise appear unusual and potentially in need of investigation by market regulators.”

Scarcity pricing is applicable to other markets like limited-edition whiskeys, tickets for a winning sports team, or a popular restaurant where it’s challenging to secure a reservation, according to McCluskey. In each scenario, consumers desire a high-value product or experience that is limited in supply.

“What’s important is that the product is high quality,” she said. “While cult wine producers can use this research to inform their pricing strategies, not everyone would benefit from scarcity pricing.”

The study also examined the role of the secondary market, where cult wines are often resold for a significantly higher prices than their release prices. While the secondary market sellers receive the short-term profits, the wineries still reap the long-term benefits as demand increases over time.

“We looked at the price wedge, which is the difference between the secondary market price and the release price paid by those on the allocation list,” McCluskey said. “We wanted to see how the price wedge shifted the price of the wines during the next period. We also found that the bigger that price difference is, the more the demand shifts out over time.”

The researchers discovered that the greater the difference between the secondary market price and the release price, the higher the wine’s secondary market price will be the next year. As secondary market prices increased, wineries were also prompted to increase the release prices of their cult wines in future periods. However, for the scarcity-pricing strategy to work, winemakers had to be mindful of maintaining excess demand through appropriate pricing.

“The price of the allocation list wines must stay below the equilibrium level,” McCluskey said. “The secondary market price is really the equilibrium price because that’s what the market is paying.”

Wine industry economics have long interested McCluskey. In addition to researching cult wines, she has studied sustainability labels and their impact on consumer demand and willingness to pay a premium for wines. Going forward, she plans to take a closer look at other consumer behaviors and their implications for the industry.

“I’ve always been interested in wine because it’s connected to place and it’s a differentiated product,” McCluskey said. “The industry is currently facing some challenges. I hope to research how health preferences, environmental factors, and even cannabis legalization are influencing consumer demand for wine.”

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