The Price You Pay

Abstract

Contrary to the general view that markets are shaped by economic forces, bargaining power, and the prior relationships between exchange partners, this paper posits that markets can sometimes also be purely socially constructed, in the sense that prices can vary irrespective of the economic value embedded in the exchange. Building on insights from the literature on categories, we argue that sellers may react to violations of local norms on the part of particular buyers by charging them higher prices. Sellers thus provide economic benefits, in the form of lower prices, to buyers who closely adhere to the category’s norms. We test these ideas using data on the market for Champagne grapes, examining the exchange between grape growers (the sellers) and the 66 houses that make the sparkling wine (the buyers). Interviews and survey data informed us that growers have clear, normative ideas about what a Champagne house should look like and do: houses that are no longer headed by a descendant of the founder, are not located in one of the traditional Champagne villages, are relative newcomers to the industry, are part of a corporate group, supply supermarket brands, operate winemaking subsidiaries abroad, or acquire their own vineyards are all viewed in a negative light. Our models provide strong support for our prediction, showing that the prices different organizations are charged for their purchases depend substantially on whether they meet local expectations for who they are and what they do. Our qualitative evidence confirms that this differential pricing by growers occurs not through collusion but through a spontaneous, bottom-up process.