Question of the Day: What’s Up With Restaurant Wine Prices?

Yesterday, we posted a Q&A with economist and all-around smart guy Steve Landsburg, who addresses a lot of everyday riddles in his writing. Sometime in the next few days, we’ll be posting excerpts from the economist Robert Frank‘s new book The Economic Naturalist. So far, I am loving Frank’s book. It poses a series of questions about small, real-world riddles, most of them asked over the years by his students. The questions are great, and so are the answers.

So, in tribute to the Landsburg/Frank school of everyday questions, let me pass along this e-mail from a reader named Martin Seebach. Maybe you can answer his question:

Every few months I like to take my girlfriend out to a higher-end restaurant and have a nice dinner. While the price of food items seems to be closely related to cost of food in the dish (e.g. , a 12-ounce steak dinner is maybe 30% more expensive than the 6-ounce dinner, not double or more, as both include the same side dishes and sauce), the markup on wine is extremely high, and progressive.

Depending on the place, wine by the bottle has at least a 200% markup, and that markup seems to be constant as the base-cost of the wine rises. This means that I will typically choose the $50 bottle over the $70 bottle, and definitely over the $120 bottle, even though the difference in base cost to the restaurant is maybe only $7 and $25. Had they offered me the bottles at $50, $60 and $75, I might have bought one of the more expensive ones, and (a) made the restaurant a larger profit at almost the exact same cost (not counting the added cost of having the more expensive inventory); and (b) been much happier, drinking the better wine, and more likely to come back.

Am I not seeing something here?

How true do you find Seebach’s observation, and how do you explain it?

I do believe that a high wine price is, to a certain kind of customer, a valuable signal to your dining partner/s that you are (a) knowledgable about something as important as wine; and (b) able and willing to spend a lot of money on something that will (c) impress the partner/s.

If you have any time on your hands, you may want to poke around on this wine economic site, or on this fine wine blog, or, if you’re really bored at work, the Journal of Wine Economics.

UPDATE: Here’s what Frank has to say on the topic, from his book Microeconomics & Behavior:

Similar pricing strategies affect recovery of the costs of variety in virtually every industry. Consider again the restaurant industry. In a city in which most people have cars, which is to say in virtually every city, the cheapest way to provide restaurant meals would be to have a single restaurant with only one item on the menu … But people don’t want the same meal every night, any more than they all want the same kind of car …

How are the extra costs of all this variety apportioned? Most restaurants price the different items on their menus in differing multiples of marginal cost. Alcoholic beverages, desserts, and coffee, in particular, are almost always priced at several times marginal cost, whereas the markup on most entrees is much smaller.

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  1. sophistry says:

    Since this is a high end restaurant…. there is probably a fatter tail in the right hand distribution of patron’s willingness to pay for high end wine and the restaurant was simply trying to profit maximize on that.

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  2. sophistry says:

    Since this is a high end restaurant…. there is probably a fatter tail in the right hand distribution of patron’s willingness to pay for high end wine and the restaurant was simply trying to profit maximize on that.

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  3. kah says:

    One thing is that isn’t true that the price of food items is always closely related to cost of food in the dish. It is related to what the customer will pay for food in the dish.

    Customers evaluate the value of food by a lot of metrics other than what the raw ingredients cost. The case of weighed quantities of meat is a rare one, because it cues the customer to focus on raw ingredients.

    Customers will pay a whole lot for something made with cheap ingredients that is inconvenient to prepare at home. For example, the raw ingredients of pumpkin ravioli with sage butter sauce are extremely cheap, but customers will pay a lot for that dish because it is tasty yet inconvenient to prepare at home. If you don’t get it at the restaurant, you’ll likely never get it at all.

    Perhaps the same is true for expensive wines – customers feel that if they don’t get them at the restaurant, they’ll never get them at all because it is inconvenient to establish a good relationship with a wine merchant and educate themselves about wine.

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  4. kah says:

    One thing is that isn’t true that the price of food items is always closely related to cost of food in the dish. It is related to what the customer will pay for food in the dish.

    Customers evaluate the value of food by a lot of metrics other than what the raw ingredients cost. The case of weighed quantities of meat is a rare one, because it cues the customer to focus on raw ingredients.

    Customers will pay a whole lot for something made with cheap ingredients that is inconvenient to prepare at home. For example, the raw ingredients of pumpkin ravioli with sage butter sauce are extremely cheap, but customers will pay a lot for that dish because it is tasty yet inconvenient to prepare at home. If you don’t get it at the restaurant, you’ll likely never get it at all.

    Perhaps the same is true for expensive wines – customers feel that if they don’t get them at the restaurant, they’ll never get them at all because it is inconvenient to establish a good relationship with a wine merchant and educate themselves about wine.

    Thumb up 0 Thumb down 0
  5. econ2econ says:

    Most restaurants don’t make much profit on the entrees. They make it on the upsells (appetizers, drinks, desserts). Take the chain restaurant staple, the BloominAwesomeOnionCactus thing. It’s an onion. And flour. And cheap vegetable oil. And they charge you at least $6 for it.

    I don’t claim to know anything about the wine market (other than I like to drink it), but it does seem like good impressions are one of the main drivers in demand for a really high end wine, whether it be a date or a big client. As for my own dining budget, the upcharges for wine make me appreciate Chicago’s BYOBs that much more.

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  6. econ2econ says:

    Most restaurants don’t make much profit on the entrees. They make it on the upsells (appetizers, drinks, desserts). Take the chain restaurant staple, the BloominAwesomeOnionCactus thing. It’s an onion. And flour. And cheap vegetable oil. And they charge you at least $6 for it.

    I don’t claim to know anything about the wine market (other than I like to drink it), but it does seem like good impressions are one of the main drivers in demand for a really high end wine, whether it be a date or a big client. As for my own dining budget, the upcharges for wine make me appreciate Chicago’s BYOBs that much more.

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  7. chappy8 says:

    I agree with #1 that it is simply a willingness to pay thing. I must also say that it is a cultural thing. My experience from my travels in Europe is that there is much, much less mark-up on restaurant wine (and alcohol generally). I think wine is viewed much more as a luxury good in the United States.

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  8. chappy8 says:

    I agree with #1 that it is simply a willingness to pay thing. I must also say that it is a cultural thing. My experience from my travels in Europe is that there is much, much less mark-up on restaurant wine (and alcohol generally). I think wine is viewed much more as a luxury good in the United States.

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