Strategic Implications of the Relationship Between Price and Willingness to Pay: Evidence from a Wine-Tasting Experiment

Abstract

AbstractWe empirically examine the relationship between price and willingness to pay (WTP) for wines by conducting a wine-tasting experiment with a manipulation of price similar to that used by Plassman et al. (2008); that is, with the same wines being presented at different prices. We find that for non-expert wine consumers a complex interaction exists between wine appreciation, price and WTP. The key conclusions from the study are that for non-expert wine consumers (1) there is no relationship between intrinsic wine character and enjoyment (individuals rated the same wines quite differently), and (2) price influences both appreciation of wine and WTP, but the latter more strongly. Buying decisions are determined by consumer surplus (the difference between WTP and price), and yet, for non-expert wine drinkers, WTP is itself strongly influenced by price. This complex interaction between the factors that determine buying behavior has strategic implications for competitors in the wine industry. We suggest an understanding of the relationship between WTP and price can be used to shed light on the crisis recently experienced by the Australian wine industry. (JEL Classifications: C91, D03, M30)