Thursday, July 13, 2006

Social Influences on Price -- Food and Wine Edition

Tyler Cowen's latest economic scene column in the NYTimes discusses papers from the 1st International Conference on Quantitative Gastronomy and the Journal of Wine Economics (two entities I discussed previously). Throughout the article, he highlights the effect of certain status markers on price. E.g., Olivier Gergaud, Vincenzo Verardi, and Linett Montaño Guzmán have found that a Michelin star raises prices in Parisian restaurants by 20 percent even controlling for measures of quality, decor, and location. Similarly, Sébastian Lecocq and Michael Visser argue that published rankings and labels affect wine prices more than the results of subjective taste tests. So food and wine, unsurprisingly, join a long list of items (including music, clothes, and prescription drugs) where differences in demand (and thus price) are only loosely related to differences in the intrinsic value of the products.

While I understand that often these differences stem from social preferences (i.e., we value certain products and experiences more because other members of our reference group are doing them as well), I still think it is semi-tragic that many consumers buy products that are ill-suited for their tastes and many suppliers (who would be increasing the set of choices available) are unable to succeed as a result.

In particular, it is frustrating how often such inefficiencies are purely the result of difficulties disseminating information. Historically, when person A went to restaurant X or purchased product Y, they may have shared their thoughts on the experience with a few members of their social network, and their friends may have, in turn, spread the information a little further. However, frequently, the members of A's extended social network aren't that interested in X or Y or they know that A's tastes are not well aligned with their own. As such, only a limited amount of information accumulates.

At some point, the economy became specialized enough that we started to employ experts whose job entails sampling products and reporting their opinions using mass media. While this system improves the amount of information available, this arrangement is not flawless. Reviewers can be corrupted (see payola scandals), and typically people had access to only a small set of experts (frequently there was only one expert per industry per area). As such, the distribution of reviewer preferences only weakly correlates with the distribution of preferences in the population, so many people are still unable to cheaply discover products that are well suited to their tastes.

Fortunately, we now have the internet. Since any fool can now publish and distribute their opinions worldwide at very low cost, the distribution of information and opinion is more likely to reflect the true underlying distribution. As such, as we learn how to effectively summarize the information available on the internet and find the people whose preferences align well with our own, I would expect (and hope) the return (above what we would expect based on quality) from things like Michelin stars to fall.

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