I like this video, although it could be done with lots of products other than wine.
There’s actually some hugely complex microeconomics going on in the background, which you can peruse after you watch this video entitled “Expensive Wine Is for Suckers” from Vox.
The way that we normally think about supply and demand is that quality is a shift variable for demand: perceived higher quality shifts demand to the right, increasing prices and quantity.
What they’re discussing in this video isn’t contradictory to that, but it’s not simple to see that.
If you’ve ever had me for a face-to-face class, this is an example of what I’m getting at when I bring the clear piece of polycarbonate plastic to class and have two students hold it up in front of the projector so that we can see it’s shadow on the board.
What they’re arguing instead is that price is a shift variable for quality, in a graph with quantity and quality on the axes instead of quantity and price. That’s weird, right? What would demand look like in the graph if we change the vertical axis from price to quality? It would be upward sloping.
Why is that so?
Go back to the case of the typical demand and supply with quantity and price on the axes. When we figure out the slope of demand, we hold quality constant (holding other stuff constant is what ceterus paribus means). So, for something of constant quality, when the price is higher, we buy less. That makes demand slope down (when going from left to right). Quality is then a shift variable in that framework because if we held quality constant to trace out that demand, then if we allow quality to change we must be going to a different demand.
Now, do the same thing, except let’s label the axes as quantity and quality, and hold prices constant. What will demand look like as quality improves but price stays constant? Well, you’ll buy more, right? That means that in a graph with these axes demand slopes upwards (going from left to right): higher quality is associated with higher quantity bought.
What they’re saying in the video is that higher price is a signal of higher quality. This means that it’s a shift variable. Now this is a bit weird, but hold actual quality constant on that upward sloping demand in quantity-quality space. A higher price is a signal of higher quality, meaning you’ll buy more, and that demand will shift to the right at that particular quality you’ve been holding constant. This is complex, but it works because “signal of higher quality” and “particular quality” are not the same thing: the first is an expectation, while the second is a fact.
The bottom line is that the people in the video aren’t irrational for thinking that the high priced wine tastes better only when they’ve been told it’s price is higher. All they’re doing is using the signal they were given the same way they always do.
What’s irrational is that we do stuff like this all the time, and we don’t realize that it’s the behavior that’s weird, not the decisions based on it.
Unfortunately, the takeaway from this may be that the best thing is to let other people buy expensive stuff and serve it to you as their guest.