Monday, February 8, 2016

Signalling With a Bottle

If you didn't know anything about the beers, which one would you assume is the lowest quality?


I am sure I have written about this before, but I am too lazy busy to look, but this New York Times article about craft breweries move to bigger bottles seems to resonate with the economic theory of signalling.

In the signalling theory it is the act of signalling itself (thought replicable by anyone) that provides credible evidence of quality. 

The classic example is in education:  One reason we go for higher degrees is to demonstrate that we are smart and productive workers to would be employees.  We can show them a college degree, for example, and from this they can take away that I must be a  high 'quality' worker.  Why? Well it is not the stuff I learned necessarily but that getting a degree is costly, it takes time and money.  But it is MORE costly for less smart and motivated people because they make take longer, have to study harder and so on.  In equilibrium it turns out that the degree is indeed a signal because only the smart productive types will bother to get them.  The lower types will not because if they do they will have wasted time and money because once they join in the degree getting crowd, the degree is no longer a singal of quality.

[Clever theory eh? Clever enough to win the Nobel prize...]

What does this have to do with bottles?  Well, suppose that bottling in fancy bottles with corks and foil and stuff is more expensive.  Good breweries want to signal their high quality by packaging their beer in fancy bottles.  Bad breweries would like to do the same.  The problem is that bad breweries face the exact same cost of sticking it into a fancy bottle (and even the premise isn't always correct - a simpel 22oz bottle is cheaper to sell beer in than a 12 ounce bottle).

So signalling alone doesn't explain this but the idea of experience goods can potentially reconcile the theory.  Since beer is a repeat purchase, consumers are quick to learn abut the type.  So packaging in a fancy bottle might work once, but not over time.  In the end the low quality brewers abandon the big more expensive bottles because they are not fooling anyone anyway and it is more expensive, while high quality maintain it because after the low quality ones leave a fancy package is, in fact, a credible signal of quality. 

The subtle point in all of this is that these are equilibrium outcomes - that in the end there is an equilibrium where high quality brewers choose fancy bottles and low quality brewers do not and both are content with their decisions. 

For me though, I tend to concur with the big bottle critics: I am the only beer drinker in my household and thus I cannot buy more than 12 ounces of a big beer without wastage (of either the beer or me). 

Friday, February 5, 2016

What Something is 'Worth' - The Westvleteren Question

Update: Here is one from the archives that matches the recent pod.  With an update at the end. 

Sometimes being an economist makes life very simple (some might say overly simplistic) but I am amused by the frantic talk about the release of the Westvleteren 12 in the US.  I'll riff off of Jeff at Beervana:
The cost is dear ($85 for six), but it goes to the monks at Sint Sixtus as a part of their capital fundraising effort to build a new roof. So you could think of it as a donation in which the monks give you a token for your support. I would strongly urge you to consider that when weighing the question of "worth." (You might also compare it against the price of a plane ticket to Brussels.)
Fortunately, the question of worth is something long ago settled by economists. Worth is a function of supply and demand.  There is nothing intrinsic to gold that makes it worth more except the fact that is is malleable, shiny and rate.  So demand is high because of its good attributes and supply is scarce making it an expensive little item.  Water is absolutely vital to life but not very scarce and so we buy it very cheaply and so on...

So is Westvleteren 12 worth $85 for six?  Well that is for you to decide, for some it will not be and for others it will. This will be a function of how much enjoyment you'll get from drinking it, how much you cherish the opportunity to try it and your ability to pay for it (among other things).  Whether the market thinks it is worth it depends on whether there are enough people who think so relative to the amount for sale.  I suspect the answer will be a resounding 'yes.' 

Class dismissed.

This is also apropos to the discussion in the previous podcast, is there a craft beer bubble.  If it is the market and the market alone that establishes the market value of a good. In this sense if the market price of something seems absurdly high it is odd to call it is bubble.  

But here is a thought question: Do you value something simply because of its scarcity?  Would you, for example, be willing to pay extra for a bottle of beer simply to be able to say you have tried it?  I think that for a number of consumers the answer is yes and this inflates the price?  But is this any less of a reason to play for a beer than the actual quality of the beer inside?  To an economist the answer is no.  It doesn't matter.  We are agnostic about where preferences come from.  Which is why I say sometimes being an economist makes things simple - we tend to look at the world without any judgement, we just try and explain the phenomena we see - for better or worse.