The Economics of Wine Prices

David Leonhardt says that we're living in a "golden age of inexpensive wine," and I'd agree, although I might take issue with anybody who describes Yellow Tail as "terrific". I'd also agree with Leonhardt's main point, which is that alcohol taxes should be raised.

But it's clearly not low alcohol taxes which are responsible for low wine prices. At the moment, wine is taxed at $1.07 per gallon, which is 21 cents per bottle. If those taxes were doubled, as Leonhardt advocates, they would be the grand total of 42 cents per bottle, which is still rather less than the cost of the cork. Winemakers worried about costs could just switch to screw tops, and thereby both reduce the price of their wine and improve its quality.

As Leonhardt does note, the main reason that there's lots of good inexpensive wine is globalization. But what he doesn't note is that he and I are spoiled by living in New York - a city where it's very easy to find excellent low-priced wines from all over the world. I was even more fortunate to grow up in London, which has never relinquished its status as the premier importer of global wines. In both cases, we are lucky that we live in regions where wine isn't grown. (Yes, I've had wines from both New York State and England, and a couple of them have actually been quite good. But they're still not wine-growing regions.)

I love to travel to wine-producing regions: they're invariably stunningly beautiful, and it's great to be able to drink something wonderful which was locally produced. But if you go into a retailer in those locations, you'll (understandably) find nothing but domestic wines. Even in major cosmopolitan cities like San Francisco, Paris, and Milan, it's often very hard to find anything imported.

But what really fascinates me, from an economics point of view, is the whole issue of competition and economies of scale at the retail level. In the UK, the main wine retailers are a handful of nationwide wine specialists, on the one hand, and the supermarkets, on the other. All of them have aggressive buyers who source wines in massive quantities and can negotiate very low prices - which is great for the consumer.

On the other hand, in New York wine retailers are limited to having only one store in the whole state. There are no chains; and now that Trader Joe's has opened a wine store on 14th Street, for instance, it's barred from opening another one anywhere else in the state. As a result, the city is full of quirky and characterful wine shops (as well as much more seedy liquor stores). There's precious little overlap in terms of wines between one shop and the next, which means that they don't really compete on price but rather on the quality of their selection and the helpfulness of their staff.

And yet, for those of us who consider ourselves very price-sensitive when it comes to wine (since the correlation between price and quality is very, very low), the bargains to be found in New York wine stores are often better value than anything which can be found in a Californian or Midwestern supermarket. Certainly the NYC Trader Joe's doesn't compete nearly as well on price in its wine shop as it does in its food shop - I think the reason is that, betraying its California roots, it specializes in Californian wine, which is generally overpriced.

So how is it that prices are lower in a state which actively discourages price competition than they are in states where wine is sold in supermarkets? I have to say it beats me. But I do think that, at least when it comes to wine, Leonhardt might be wrong when he says that "even a modest price increase will lead to a decline in drinking". Wine prices work in weird and peculiar ways, and I'm not convinced that raising wine taxes by 20 cents a bottle would affect total wine consumption at all. Indeed, it might even at the margin help prompt America's supermarkets to look abroad for cheaper wines - which would decrease wine prices and increase consumption.