Cost Analysis

Discussion on “The Price You Pay: Why Some Wines Cost More Than Others” (The Wall Street Journal, Sept. 12-13, 2009)

 Summary

The article “The Price You Pay: Why Some Wines Cost More than Others” discusses why there are such variances in the cost of a bottle of wine. The price of a bottle of wine is not merely based off what it tastes like; there are many other factors to consider. The grapes used to make the wine have a large impact on the final price. The value of grapes depends on the location and the value of the land which they are grown on. If the grapes are from a vineyard in Napa Valley, they are more likely to have a higher value, thus raising the price of a bottle. In this sense, location of the vineyard is similar to real estate, for perception is related to value. Different varieties of grapes also impact the final price. Popular and well enjoyed grapes will often have a higher price. There are also many other costs of productions that affect the cost of a bottle of wine. Producers must consider the cost of labels, corks, bottles, barrels, tanks, and other inputs as they price the bottle. Economies of scale also play a large factor in bottle price. As more bottles of wine are produced, the unit cost of producing a bottle decreases, making it possible to still have reasonably priced bottles of wine. These factors influence wine bottles’ large range of prices. The article advises that consumers with a more modest budget look for alternative and wine regions and grapes. This article is relevant to classroom theory because it is about the cost of production. There are many costs to consider when producing and pricing a bottle of wine. This article also deals with implicit costs, which are the next best alternative that the resources used in production could have produced instead. An example of an implicit cost in the article would be foregoing one type of grape in favor of another type.

 Commentary

There are several factors that influence the price of a bottle of wine. One determinant is the types of barrels you use in the aging process. A typical French barrel, which holds up to 23 cases of wine, costs you $1,000, while a stainless steel tank can range from $10,000 to $20,000. And a new state of the art bottling line can put you back up to $500,000. In addition, high quality labels and corks can cost from $0.50 to $1.00 each. This large disparity in fixed costs play a huge factor in the price you charge to consumers. Even with the high fixed costs of starting your own vineyard, economies of scale (in the long run) allow for reasonable prices.

 Real World Application

One of the concepts mentioned in this article mentioned how the particular inputs of the product impacted the overall cost of production. Pointing to the idea that wine which is priced ten times higher than another wine may not necessarily taste ten times better; rather it is the consumer perception of the inputs placed into the production process. Real estate is an example that is both mentioned in this article, and is a great example of what we are seeing with the varying wine prices. Two different apartments–both built with very similar size, layouts/floor plans, quality, and features, have an extreme variance in listing price. The variance may be almost exclusively due to their relative locations. Apartment one may be located in a highly valued area in New York City, Chicago, etc. Whereas the other apartment unit may be located in the outskirts of those cities or even in the downtown area of a much smaller city. The difference in listing prices in this case is mostly dependent on the consumer perception of what may be more valuable or preferred.

Posted by Nick, Coley and Jenna (Section 1)

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