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Market demand and supply

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  • Market demand and supply

The rising price of Champagne

Like so many goods in this inflationary period, there has been a significant increase in the price of luxury items over the last 12 months. An example of this is Champagne which has increased in price by 20 per cent since 2019. This does not, however, seem to have adversely affected the demand for Champagne where sales are expected to hit a new record of more than $6 billion worldwide this year. An increase of 32 per cent.

Whilst an increase in demand accounts for some of the price increase, part of the price increase in Champagne is also due to recent production issues with bad weather reducing the supply of the grapes needed to make Champagne.

The 20 per cent increase in the price of Champagne is made more significant because of its relatively high price as a product. The average price of a 70cl bottle of Champagne in Europe is around $25 which is about twice the price of other sparkling wines such as Cava (produced in Spain) and Prosecco (produced in Italy).

Why is Champagne so expensive?

One reason for its high price is that the product sold under the name of Champagne can only be produced in the Champagne region of France which limits its supply and with strong global demand this forces up the price. The traditional processes used to produce Champagne are also seen as more expensive compared to other sparkling wines.

The other reason Champagne is so expensive is because of its exclusive luxury brand image in the mind of consumers. Names such as Moet & Chandon, Bollinger, and Dom Perignon are synonymous with luxury and prestige and consumers are willing to pay a high price for the product. A 75cl bottle of Dom Perignon has an average retail price of about $170. Therefore high demand and limited supply are crucial factors in explaining the high price of Champagne.

Behavioural economics and the market for Champagne?

Many people are aware of Champagne as a ‘luxury’ brand from a very young age because of its image in popular culture. Many of us have images of ships being launched to the breaking of a Champagne bottle on their bow, or the spraying of Champagne by the winner of a major sports event, or toasting someone at a family gathering. The positive image in the mind of the consumer from a young age creates a bias towards Champagne ahead of other sparkling wines. For right or wrong, many people have a strong positive attraction to Champagne even before they are old enough to drink it. The bias we have towards Champagne can be used by the producers of the product to market it successfully at a high price. When considering the strength of the Champagne brand it is also worth thinking about the choice architecture associated with the product. The heavy bottle with the gold foil around the neck and often in a beautifully designed box all contribute to the exclusivity of Champagne relative to its competing sparkling wines.

One last point worth noting is that Champagne is, for all its luxury, a recreational drug and is considered to be a demerit good. All governments impose some regulations and/or taxes on Champagne and some governments even make its consumption illegal.

Things to discuss with a class

Using a demand and demand and supply diagram explain why the price of Champagne might have increased over the last 12 months.

  • The price of Champagne might have increased over the last 12 months because of rising incomes as economies have recovered from the pandemic. Champagne is a luxury good so rising incomes would lead to a rise in demand from D to D1 in the diagram and lead to an increase in price from P to P1.
  • The price of Champagne might also have increased as bad weather in the Champagne region of France has led to a decrease in the supply of grapes which would have caused the supply of Champagne to decrease from S to S1 and led to an increase in price from P to P1.

Explain the influence bias might have amongst consumers in affecting the demand for Champagne.

A bias occurs in the mind of consumers when they make a buying decision based on psychological factors that take them away from making a decision based on evidence and reason. Consumers might be biased in favour of Champagne because of positive psychological factors they have been exposed to from the earliest moments in their lives. This means buyers favour Champagne ahead of other sparkling wines (even though they might offer higher utility per $ spent) and this increases the demand for Champagne. 

Explain why alcoholic drinks such as Champagne are considered to be demerit goods.

A demerit good is a good or service that society believes people should not consume or its consumption should be restricted. Demerit goods are often associated with external costs. As an alcoholic drink, Champagne would be considered a demerit good because of the negative externalities associated with the consumption of alcohol such as drinking and driving, use of the healthcare system for alcohol-related illnesses and violence caused by the consumption of alcohol. Governments also intervene in the market for alcohol to protect individuals who consume it from the negative physical and mental health consequences of its consumption.