# Economic theory applied to combating ‘wine scalping’

From the Wine Spectator Blog:

How much would you pay for a bottle of California Sauvignon Blanc?

The only wine from that category to ever earn a classic rating, the 2007 Merry Edwards Russian River Valley (96 points), cost \$29, and the current vintage, 2011, is \$30. So would you pay more than eight times that for a bottle of Screaming Eagle Sauvignon Blanc Napa Valley? No? Well what if I told you that you could immediately turn around and resell it for 10 times that price? (That’s more than \$2,500 for a single bottle of Napa Sauvignon Blanc, for those still trying to do the math, at a profit of \$2,250 per bottle.)

That was the conundrum facing a select group of Screaming Eagle mailing-list members this past summer when California’s most famous cult label released 100 six-packs of a 2010 Sauvignon Blanc priced at \$1,500 each. The wines started showing up at auction soon thereafter, with a six-bottle lot in its original wooden case selling for \$15,535 at a Spectrum auction in June.

Screaming Eagle’s representatives weren’t happy at all about the “wine scalping,” or what is known more politely in the wine business as “wine flipping.”

Here’s an economics quiz:

Q: According to economic theory, what should Screaming Eagle do to combat “wine flipping” of its Sauvignon Blanc in the future?

A. Increase production to put downward pressure on the price of its cult wine.

B. Increase its wine prices, which are currently way far below the “market-clearing” price?

C. Decrease wine production.

D. Answers A and B are correct.

If you answered D, you pass basic economic price theory, and if you answered C, you flunk basic economics.

Screaming Eagle’s owners selected answer C, flunked basic economics and announced that the winery would cut production of its 2011 vintage to just 300 bottles, half the number of bottles they produced for their 2010 cult variety. Here’s more from the article:

“The 2010 Screaming Eagle Sauvignon Blanc was for their personal use only,” Screaming Eagle direct-to-consumer manager Patrick Chapman told Wine-Searcher.com in June as the Spectrum auction bids were coming in. “And, of course, people said it was for their personal use only, but the reality is that it wasn’t. People are turning it over for profit, for their own selfish greed.”

Prediction: By halving the supply of the high-demand cult wine, the price will skyrocket and the incentive to “flip” Screaming Eagle will go up in the future, not down.  As the author of the article points out, “If anything, the 2011 bottling’s rarity will only push demand—and its auction value—even higher.” If the goal is to reduce “flipping” my recommendation for Screaming Eagle is to follow economic theory and increase the supply of 2011 Sauvignon Blanc, not decrease it. Perhaps that’s not possible given growing constraints, etc.  But in any case, Screaming Eagle should defiinitely raise the price of its sought-after wine.

HT: Mike Saltsman

## 50 thoughts on “Economic theory applied to combating ‘wine scalping’”

1. mark-

it’s not quite that simple.

wine production varies a great deal year to year based on things outside of a winemakers control.

2011 was a small crop for a lot of wines. that was weather, not production decisions. it was a late start to summer and a cool summer to boot which led to small grapes and some interesting and dense wines, but production was down around 10% statewide (despite more acreage for wine grapes) and more like 30-40% for many top napa vintages.

you cannot just plant more grapes immediately and have more wine. vines take years to mature even if, and it’s a HUGE if, you have the land to plant them.

annual production at screaming eagle is 400-750 cases.

they make almost no white wine. they are famous for their cab sauv. i doubt they have 2 acres of white grapes planted.

they would do 750 every year if they could (especially since they were sold in 2006 to financial owners), but the weather and vines do not always cooperate.

it’s only a 57 acre property. you cannot just add new acreage. oakville is totally built and farmed out and there is no guarantee the terroir and vines would wind up the same. even if they did, it would be 3-7 years to get vines to produce and older vines tend toward the smaller, more concentrated grapes that the top wine makers favor. this is why you see differentiation in things like an “old vines” zinfandel.

i can absolutely see that your claim about increasing price makes sense and the notions about scalping by SE are silly, but blaming them for a deliberate drop in production is like blaming farmers for a small corn crop due to a short, dry summer. agriculture cannot always respond to price signals in the short run.

this is made even more difficult with wine as kansas has lots of land and you do not care where your corn comes from, but there is only one howell mountain for cabernet sauvignon grapes and you cannot simply add another.

clearly, many are trying. there is a lot more wine from down south around santa barbara and even from regions like the san juaquin valley etc and some is quite drinkable, but none is even reminiscent of howell mountain or oakville.

you can do a great deal with fermentation and barrel chemistry, but it has limits and tends to produce less differentiated product.

the supply of truly excellent wine land is limited and cannot be easily expanded as, in even the medium term, are supplies of old vines with more extracted fruit on such land.

• But it would be quite simple if you would back your boast of Manchester 12-baggers by supplying the supporting data, posting it right here. For what are you waiting?

You ran your your big mouth, so its incumbent upon you to back it up. Words are cheap.

By the way. Who is running the Manchester hedge fund and making the trading decisions when you spend the entire day posting right here? How many people here are interested in what you have to say? If your 12 baggers come so easy, then why aren’t you out and about marketing and pulling in tons of big fees?

We are waiting for the supporting data. Why the big secret?

• mac dummy-

i have already given it to you.

go to hedgefund.net and look it up.

everyhting you are asking for is there.

what, do you need me to read it to you?

if you are too lazy/stupid to look it up, don’t blame me for that.

and ooh, your offer to for me to break the law and jeopardize the fund i have spent 9 years building by posting results is SOOOOO tempting just to shut up a know nothing loudmouth with severe insecurities, but i think i’ll pass.

all i did was claim that lots of folks, including me, can consistently beat the market in response to your ridiculous cliam the that era of activist managers is over, a claim you yourself wound up disproving.

since then you have demonstrated that you are an innumerate boor and a liar who is not willing to even spend

also:

do try to stop lying. no one but you ever said 12 bagger as i have said a half dozen times.

you have never substantiated that claim despite repeated requests. that is because you cannot as it is a ridiculous lie.

is it that you just enjoy willful lying? does the success of others threaten you so badly that you must overcompensate with a name like “macdaddy” and repeated lies?

get a grip son. you are looking increasingly unhinged and making a fool of yourself.

my day includes lots of little periods of down time. i generally enjoy posting here and speaking with some of the folks. of course, morons like you make it less pleasant, but hey, nothing’s perfect.

• You are a liar. You have given me, or CD, noting…you have posted absolutely nothing and you have referenced and sourced absolutely zilch. You are standing there naked.

You are a phony–a not very bright phony. You are dying for some kind of attention and recognition, none of which you earned.

You got caught running your lying mouth and claiming a track record that you can’t substantiate. You have nothing to back up yourself.

And while you post here 24/7, just who is running that hot-shot Manchester Hedge Fund? You? Why aren’t you out marketing? Is running a hedge fund a part-time job?

Posting 24/7 supplies very little credibility. You are no 12 bagger, you are a faux bagger.

• that is total crap and you know it.

i cannot post my results here. it’s illegal. this has been explained to you over and over. we’re a hedge fund. we cannot publicly post results.

what i have done is tell you where you can find them.

http://www.hedgefund.net

get a trial login (free) and look it up.

it’s really that simple.

if you care so much, then do it.

i would LOVE for you to do it. then you would need to shut up.

and where are you getting this 12 bagger crap? i NEVER said that. prove i did. show me where i did and i’ll publicly take it back. but i didn’t.

put up or shut up. show me where i said that.

you can’t. because i didn’t.

what i did say is that we have generated about 9X the return to the S+P over the last 8 and change years and beaten it by around 12% points a year on a CARR basis since inception.

log on and verify it. then apologize for being such an ass.

you are a proven liar and seem to have this weird insecure obsession.

are you a stalker?

is that what it is?

do you do this to women you find online too?

do you need to register when you move into a neighborhood or somehting?

and what’s with that “macdaddy” name? what are you compensating for? is it a money problem or a trousers issue?

• Mr. 12 bagger, you are a lying fraud who posts here 24/7. Non stop, 24/7. And you got caught lying fabricating a phony history that you can’t document. Who manages your fund while you are busy posting here, your secretary? Why are you hiding behind your PC and posting here 24/7 and not out on the road, marketing?

You post a web-site that provides NO INFO. ZILCH. Its a “start your own” hedge fund sight and has nothing to do with YOU. Its a “Legal Zoom.com” for wannabe hedge funds–NOT data rich supporter of your flatulent boast. Where did you get your diploma, from the DeVry School of Hedge Funds?

No track record, no supporting data, no evidence…just “trust me, I’m a hedge fund operator.”

You are a fake, fraud and phony that has no documented professional standing. Zero. Nobody ever heard of your Manchester Fund. Could it be that you have only \$12.98 under management?

I got your number, and I’m going to abuse you right here just like you are attempting to abuse the gullible few who might believe you. I’m going to crush you like the lying bug that you are. Heads up Manchester Fund…heads up if you have a head.

Does your phone ever ring? Guess not !!

• Oh for Christ’s sake…LEAVE THE GODDAMN HEDGE FUND ALONE. That was a week ago! It’s seriously time to let it go.

• mac-

so, are you my stalker?

is there a support group for stalklees?

will i get to meet angelina jolie?

i have repeatedly given you everyhting you would need and made it clear that your claims about what i said are pure fantasy. i note that you still refuse to show me where i ever said 12 bagger.

if you spent 10% of the time you spend ranting checking the facts, this would all be settled.

i have led you to water. apparently, i cannot make you drink.

you seem like a pretty emotionally unbalanced guy with some real issues.

i’m not going to waste any more time saying the same thing to you over and over.

• Morgan,

I understand that some years at wineries produce less wine than they would like and some produce bumper crops. In fact, in order to support their brand’s price, wineries will often sell the excess production under a different name at a much cheaper price (looking out for that sort of thing is a favourite activity of ours).

I think what you missed in that original article is that Screaming Eagle is purposely decreasing wine production. The decline in production was a decision they made and and did does not result from natural constraints. That’s just stupid.

• methinks-

how do you know that?

mark makes the claim that they said they “would” cut production, but there is no evidence that it was purposeful as opposed to a response to fruit yields.

everyone in napa got a small yield in 2011.

i see no reason to suspect that SE would be any different.

my point was that it seemed to me that mark was assuming that the decline was purposeful, but that there was a more likely explanation based on weather.

wine does not work like iphones in this respect.

you do not always get a choice about how much to produce.

napa only gets half the grape yield per acre of a place like fresno to begin with.

it does not take much to see a big drop in production, especially as the SE winery has only 2 acres planted in white grapes.

budding and flowering was 2-4 weeks late in 2011. this is particularly damaging to white grapes. a cab sauv can stay on the vine later in the season and try to make up for this a bit, but not a white, especially the sav blanc which is one of the earliest ripening varietals.

the cool weather also prevented full ripening and held down sugar levels. more grapes would have been discarded.

pinot noir yields were down 50-60% in napa for 2011.

there is simply no way they could have matched the 2010 season no matter what they wanted to do.

though it will be a few years before it is bottled, i will bet that the 2011 reds will have significantly lower production than 2010 as well.

i completely agree that cutting production to thwart resale is foolish and a silly goal, but i have real doubts that is the whole story here.

that said, as andreas rightly pointed out below, reducing production CAN sometimes be a profit maximizing decision, particularly around veblen goods.

if you read the whole blog, the big issue seemed to be around summer flipping and wine transit during high temperature periods that could wreck the wine and create dissatisfied drinkers.

“Screaming Eagle estate manager Armand de Maigret clarified the winery’s policy last Friday, telling me that the members removed from the mailing list in September had been flipping their allocations during the hot summer months, when the wine could easily be cooked in transit. “If the temperature of the wine goes above 85° F, the wine is killed,” de Maigret said.

“If you do not respect the wine, from the flower to the cork to the table, then the wine will suffer,” de Maigret said. “If somebody has our wine and doesn’t respect it in transportation from place A to place B, we suffer from it. If we realize that someone is flipping the wine in a month that it is super-hot … or when it’s super-cold, and all that person is interested in is a quick buck and they don’t care about the health of the wine, then we don’t have any respect for that person and we will remove that person from the list.”"

when you have a brand as valuable as SE, protecting it may be a rational action.

• fwiw, this seems to be the pivotal comment on the blog:

“The wines started showing up at auction soon thereafter, with a six-bottle lot in its original wooden case selling for \$15,535 at a Spectrum auction in June. Screaming Eagle’s representatives weren’t happy, announcing that they would limit the 2011 production to just 300 bottles.”

this seems assumptive to me. it does not actually say “they are cutting production to stop flipping”.

it seems to me that they actually took a different action to stop flipping:

they cut a bunch of folks who sold off their mailing list and therefore rendered them unable to buy again.

if you want to stop flipping, that seems like how to do it.

screaming eagle wines are numbered by bottle. it’s no challenge to figure out who sold.

flip your wine, and it will be the last bottle you get to buy. that would stop the practice dead.

why cut production if you can just do that which is both more effective and profitable?

there have been a lot of angry folks who got got cut complaining online, but i think they have misrepresented the situation somewhat.

this whole thing boils down to freedom of contract crashing into freedom of markets.

i am not sure what the SE membership/purchase agreement looks like.

if it says somehting like “these wines are for personal use and resale is forbidden” then that’s that. you know when you buy that that is the case and ought to abide by the agreement you made.

whether such a policy is good or bad for a winery trying to maintain the price and desirability of an uber luxury good is debatable, but at the end of the day, it seems to me that it’s just up to them.

if they choose exclusivity and grandeur over profit, well, hey, it’s their winery.

• Morgan,

how do you know that?

mark makes the claim that they said they “would” cut production, but there is no evidence that it was purposeful as opposed to a response to fruit yields.

Here’s the evidence (from the article):

“Screaming Eagle’s representatives weren’t happy, announcing that they would limit the 2011 production to just 300 bottles.”

to me, that sounds like an intentional act, not the consequence of a natural constraint.

if you read the whole blog, the big issue seemed to be around summer flipping and wine transit during high temperature periods that could wreck the wine and create dissatisfied drinkers.

That actually sounded like just plain whining and thin justifications to me since cooked wine resulting from the bad shipping practices of a reseller wouldn’t reflect on the winery. Although, I can understand why the vintner wouldn’t want to sell to those customers again.

that said, as andreas rightly pointed out below, reducing production CAN sometimes be a profit maximizing decision, particularly around veblen goods.

Yeah, Patek Philippe does that as well as Hermes. But, we’re talking about a very small output here with obviously very high demand. It’s presumptuous of a person like me to say for sure as I’m not intimately acquainted with this winery’s economics, but I bet they could accomplish all of their goals by simply jacking up their price to the price paid in the secondary market and sell their entire production at that high price, optimizing profits. No?

• i read the same line but interpreted it differently.

that seemed like the blog author adding some spin, particularly in light of how detailed his quotes were.

if the wine maker ever actually said that, i suspect there would have been a quote. maybe this is just be being too aggressive in parsing due to too much consumption of shady press releases from small firms attempting to mislead, but the whole “they cut production to stop resale” argument just does not make sense to me.

it’s not even clear how cutting production would stop resale whereas slicing people off the list would be very effective and more profitable.

the whole thing just seems implausible as a strategy. why use a blunt ineffective tool when you have a surgical one?

“That actually sounded like just plain whining and thin justifications to me since cooked wine resulting from the bad shipping practices of a reseller wouldn’t reflect on the winery”

i’m not sure this is completely true. if it showed up tasting like stewed prunes, maybe you blame transport, but if the bottle was just a bit off, someone might drink it and say “hey, i tried screaming eagle. it was not that great.” etc.

hard to say for sure just how that would work out.

regarding profit, it’s not clear to me that that is what is being maximized here. if you jump down to the end of the thread, i lay this out a bit more, but the owner of SE is a billionaire who owns and NFL, NBA, and NHL team.

the entire output of SE is a rounding error to him. this may not be a business but a hobby or a vanity project.

he may not be seeking to maximize profit but rather prestige.

• Well, Morganovich, you’re a smart guy. People doing dumb things wouldn’t make sense to you, but people do dumb things all the time.

Of course, maybe this journalist got the story wrong, but given the other nonsensical things they said that give us a glimpse into the way they think, I wouldn’t be surprised if the article is accurate on that issue. In any case, that’s where I think Mark got his information.

, but if the bottle was just a bit off, someone might drink it and say “hey, i tried screaming eagle. it was not that great.” etc.

I don’t think so. If it’s bad and it’s selling for that price that disconnect would make you think it’s storage or transport (the usual culprits, btw). Typically, bottles that are auctioned at that price are sold to serious wine buffs who know ahead of time what to look for in the wine.

he may not be seeking to maximize profit but rather prestige.

You might be right. He’s certainly not maximizing the perception of his grasp of basic economics.

2. If you thought the choice between C and D was unambiguous, you also flunk basic economics, because you have forgotten about Veblen goods.

In a universe where Screaming Eagle sells only one product, and that product is its rarest wine, increasing the price or increasing production is an unambiguously good choice. In a universe where Screaming Eagle is an actual winery (e.g., this universe) and not a non-viable manufacturer of tiny quantities of a single product, there is a strong reason to choose C.

For very expensive products, the demand curve flips upside down. As the price increases, demand also increases, until the product reaches a second break-point and it inverts again. Extraordinarily expensive wine falls into basically this category: aside from total swill, it’s impossible for most people to determine the quality of wine.

With that in mind, B seems clearly preferable to A. By increasing wine prices toward the second break-point, you might substantially increase demand for that wine. If that wine is your business’ profit center, then you’ve just made yourself some money, and can walk off into the sunset, counting your cash.

But what if it’s not?

Screaming Eagle sells its Sauvignon Blanc through a private mailing list, and only to a few, personally-selected customers. Which is why it’s a cult wine: it is extraordinarily exclusive, and available only to a few customers. A Veblen good among Veblen goods.

These customers, I presume, are long-term, high-volume, high-prestige customers of the winery. They were offered the opportunity to access a highly exclusive product by purchasing large volumes of Screaming Eagle’s products. It is not unreasonable to believe that they were induced to do so by that opportunity.

Wine scalping allows potential customers to bypass the intermediate step — e.g., “buying vast quantities of Screaming Eagle wine” — and get the product at a lower price. Neither increasing the production nor increasing the price solves the ultimate problem: how do we ensure that people can only acquire this wine by purchasing vast amounts of other wine, and feel privileged at the opportunity?

Decrease production.

Which is what they’ve done.

The product you’re complaining about, in other words, is the Veblen-curve equivalent of a loss-leader: a product sold to induce the purchase of other products.

• Andreas Schou, it depends on demand, for the wine and other wines. There’s not enough information to say there’s profit maximization. We can only assume the firm knows what it’s doing.

• You’re right, of course. I called it “ambiguous,” then proceeded with my argument as though the facts I had assumed were in evidence.

Stated more modestly, there are demand curves (and patterns of products) which make increasing a product’s exclusivity a justifiable commercial decision. It is not unlikely that this demand curve makes option C commercially justifiable.

• while your point about reverse price discrimination is valid, i think you may still be attributing too much choice to this production outcome.

this is an agricultural good. production quantity was driven by the number and size of grapes on the vines and 2011 was a year with a small crop.

this was not a decision so much as a weather based outcome.

you cannot just add more old mature vines of a specific strain in just the same part of oakville.

production of this wine cannot be varied upward in response to price even in the medium term. you have the vines you have and the weather determines the rest (though i suppose you could destroy grapes if you wanted to but i doubt that occurred).

also:

that sav blanc is not a loss leader nor somehting used to drive sales of other products in this case.

screaming eagle is renowned as a producer of Cabernet sauvignon. the white wines are just not that big a deal nor where the real cult lies in this case.

SE is all about the reds. that is 95% of production and the big issue. the whites are just a little sideshow. a magnum of the cab will cost you \$4500.

however, even veblen goods can benefit from increased production.

you need to know the shape of the curve. if you can produce more and not have price drop it may make sense. if you can produce less and have price rise more than q drops, then the reverse may be true. i don’t think we have enough info here to determine which is the better choice, but we can guess a bit.

many french wineries deliberately hold back production to keep prices high as you suggest, but given that the current waiting list to even get on the SE mailing list to buy is somehting like a decade, i suspect that price would hold if q went up (assuming it could, which i doubt) and that that would be a better driver of profit than increased price, but again, that’s just a guess as the actual shape of the curve here is not something we know.

• Yeah, co-signed on all that.

I’m not in the market for high-end wines (or for that matter high-end wineries) so I don’t know what the shape of Screaming Eagle’s demand curve looks like. Which is why I called it ‘ambiguous’ rather than ‘wrong.’

In any case, weird-looking demand curves produce weird-seeming tactical decisions. I can imagine facts upon which choosing C might have a reasonable commercial justification, and it’s not clear to me that those facts aren’t in evidence.

• You seem to have mistaken this for the ‘complain about hedge-fund returns’ forum. Everyone else is talking about the topic.

You’re trying to call someone else out on an irrelevant issue, while ignoring the fact that there’s always an element of fish-story to any financial-industry story, and everyone in the game understands that. In other words, I’m not sure why you care, why you think the victim of your attention will care, or why you think anyone else listening will care.

I can assure you that you shouldn’t, they shouldn’t, and that we don’t.

• Actually, unless it’s an individual bragging about his own returns, there’s no fish story to financial stories. In an industry built on trust, telling tales is no way to build confidence. Your current investors will know you’re lying and your potential investors will know it soon enough. And to whom would Morganovich make the effort to lie even if he didn’t publish his returns anywhere? A bunch of yahoos on the internet? Pffft. Morgan is a smart guy whose comments are always worth reading and that’s what counts here.

I don’t think anyone here actually cares how his hedge fund is doing, but I have no trouble believing his returns without registering at that hedge fund site to find out. His fund is a value investor in microcaps – a space where the edge in your trades is higher than in more liquid stocks.

I agree that this hounding of Morgan from thread to thread has gotten extremely old. In fact, it got old pretty much right away. And if I never see the word “bagger” again, it’ll be too soon.

• I agree with Andreas. The exclusive wine is clearly a marketing perk. If customers are flipping it that suggests they don’t value it enough, i.e. they prefer the cash.

Reducing the supply increases the (subjective) consumer surplus of the loyal customers while income effects should eventually stop trading. If trading still happens the loyal customers get more generously rewarded, which is the second-best perk the winery could hope for.

• i suspect the winery gives some hard thought to how to maximize profits. the owners now were financial buyers.

as a result, it strikes me as odd that they would be surprised to discover that their customers seek to maximize profits (or utility if you prefer) as well.

ironically, they may find that fewer people want the white wines if they cannot resell them. Screaming eagle fans are there for the reds, not the whites.

i wonder if as many folks would have bought the white in the first place if they had to keep it as opposed to sell it.

i can imagine a situation where you buy a half case, try one, and then say, “you know, that’s not worth \$1500, i’m selling the rest”. or even one where you never wanted it but sought to resell it from the word go.

if that was a material part of demand, the irony is that banning resale will actually decrease demand and possibly price and wind up harming SE profits.

obviously, we are starting to make a lot of assumptions here, but such an outcome certainly seems possible.

• as a result, it strikes me as odd that they would be surprised to discover that their customers seek to maximize profits (or utility if you prefer) as well

Nothing surprises me anymore.

Discussing the lottery one day, the head of fixed income sales and trading at a fairly large Wall Street bank declared that the calculated probability of winning is wrong. Baffled, my friend “Jean” challenged him by running through the calculation again to arrive at the probability.

“Aha!”, said the head “That’s what they WANT you to think! But, you see, first you have to pick the numbers and then the numbers have to pick themselves. You have to multiply that those probabilities by 2 to arrive at the correct probability of winning the lottery”.

Jean tried to reteach him basic probability. No good. He then appealed to reason and asked why the lottery would want you to think your chances are lower than they are. He got nowhere with that either.

Head of fixed income (not stupid equities) sales and trading. On a desk that committed the firm’s capital. In structured products.

I have a million such stories.

• “Aha!”, said the head “That’s what they WANT you to think!

How scary!

I envy you: Every day must be a new mind-blowing experience.

• One winemaker’s opinion on flipping. I love his line, “the ransom of success.”

From the article:

“One vintner, whose top wines regularly triple in price upon release and who has a 7,000-name-long waiting list, had no qualms whatsoever about flipping. “I came to America for a simple reason: because I like to be free, and I am a free man,” exclaimed Cayuse’s Christophe Baron, who was born in France. “Therefore, to me, if somebody buys a 3-pack of Bionic Frog—it’s a free country—if they want to flip the wine because they can make some quick money out of it, more power to them.”

No matter your opinion of flippers, there is no clearer mark of success as a winemaker and a marketer than the making of a flippable wine, and Baron wears it as a badge of honor. “It makes me happy!” he said. “At the end of the day it validates my work, as simple as that. It is the ransom of success.”

3. “If you answered D, you pass basic economic price theory, and if you answered C, you flunk basic economics.” — Mark Perry

Yes, but if you did either of those, you flunked basic marketing. In that context, the answer is E, do what ever you have to to drive the price up to ridiculous heights in order to generate publicity. And when the Wine Spectator blog and other trade related publications start hyping it, and that hype spills over into the general media – mission accomplished. Now everyone wants to know what is so special about your wines that some moron would be willing to pay \$2500+ a bottle for one.

Next question, what size should the initial public offering of your popular tech company be?

4. The question is wrong. It should be:

Q. How should they maximize their profits?

C might well be a good answer to this question. We don’t have enough facts to know for sure.

• joe-

we could even go a step further and ask a difference question:

SE was bought in 2006 by stanley kroenke. stanley is a billionaire real estate developer who owns and NFL, and NBA, and an NHL team.

the entire output of screaming eagle is 600 cases a year.

even at \$1600 a bottle, that’s maybe \$11 million. i doubt it throws off enough profit that it’s even a rounding error for this guy.

screaming eagle is juts a hobby for him. it’s a vanity project. this is his equivalent of a rich country gent growing prize winning roses.

not everyhting is run as a business and with profit maximization as the key goal.

the more i think about it, the more i suspect that may be the case here.

if this is a vanity project, then he want to maximize reputation and glory/glamor/exclusivity not profit and he is rich enough to afford to make that choice.

individuals maximize utility not profit. you COULD work more but you do not because you value leisure time more than the extra profit.

perhaps he COULD make more money on SE, but would rather maximize somehting else.

• As I said in my response above, you might very well be right.

But, this is an economics blog. And the original question was: ” According to economic theory, what should Screaming Eagle do to combat “wine flipping” of its Sauvignon Blanc in the future?”

non-profit-maximizing vanity project or not, decreasing production still ain’t fixing your flipping problem. If you’re unable to increase production, only raising the price to the one paid in the secondary market will do that.

• understood.

what you do to stop flipping is precisely what they did:

you cut the flippers off your mailing list and never let them buy again and make it clear you will do the same to anyone else.

it’s simple and effective.

given that they, right or wrong, did do that and that i think we agree that it would be a very effective deterrent, then why would they bother also doing somehting so ridiculous and ineffective to pursue a goal they already achieved?

i mean, we can make the “they are just dumb” argument about virtually anyhting. but kroenke has sure made a ton of money and been incredibly successful for a guy who is dumb about business.

they found what looks to me to be a very easy and effective response to achieve their goals. it seems odd to me to then assume that they suddenly became stupid.

i think occams razor would have us search elsewhere.

the fact is that production of white grapes was down 30-50% all over napa for 2011 and the acreage for white grapes at SE did not change.

i would be willing to bet that whatever rationalizations got tacked on, that the drop in production was going to happen no matter what.

it’s possible that some winemaker made some comments that have been inaccurately seized on or maybe that he was happy production dropped, but i suspect they could not have produced anything like the 2010 volume no matter what they wanted.

i also wonder just who made this choice? the winemakers get quoted, but they are not the owners. i do not know who makes production decisions there.

• No, I don’t agree that what they did is an effective deterrent to flipping.

An effective deterrent would be to squash the profit in flipping by increasing the price to where the product is selling in the secondary market.

The action the winery took will just drive the auctions out of sight into the black market.

I have no doubt Kroenke is smart and made a lot of money in business. But that doesn’t mean he doesn’t make mistakes. Assuming we have all the facts before us, I think this is a mistake.

We all make them. Don’t you ever do a trade and think afterward “What the hell did I just do? Christ!”?

• “No, I don’t agree that what they did is an effective deterrent to flipping.

An effective deterrent would be to squash the profit in flipping by increasing the price to where the product is selling in the secondary market.”

not necessarily.

even a dutch auction would not work to do it.

only by taking bids and filling the top 600 at the individual bid prices could you eliminate incentives to flip.

if you have 600 bottles and could sell them at \$500 each, great, but what if one guy would pay \$1000?

you still get flipping. i buy for \$500 and sell to him, or sell him half my wine and get mine for free.

but if you up the price to \$1000, you cannot sell all 600 bottles. the market does not clear.

if there is a wide range in terms of what folks will pay, you are going to get flipping of a collectible or you will be unable to clear the market.

if you price at \$900, maybe you only sell 400 bottles and some guy still flips.

only by pricing at the highest value anyone places on a bottle can you avoid a flip, and that may mean you only sell one bottle. (or you could take the top 600 bids at bid price) but just upping the price will not work to both sell the wine and stop flipping.

how would you set a clearing price while also finding a price that no one is will to pay more than? those seem like impossible simultaneous goals unless the utility curves of all market participants are identical or at least very similar.

i doubt that is the case here.

we see this in IPO’s all the time. you set a price in an auction, then the trading starts and guys who value it more than the clearing price for the IPO bid it up. sure, not every IPO, but screaming eagle is a VERY hot deal and the allocations are limited per buyer. there’s no stopping that and getting a clearing price for the deal.

as every bottle is numbered, you can easily tell who flipped and cut them off. if, as i suspect they do, most members of the very short list that gets a chance to buy SE wine value their ongoing membership more than the flip profit (and guys who pay \$1600 for cab seem likely to) will stop flipping.

to be sure, this would never work for a raw commodity like corn, but for something numbered, this absolutely works.

i think ferrari does this same thing. you can often sell a new ferrari for more than dealer to someone who wants to avoid the 18 month wait list, but if you do, i think they cut you off and will not sell you another.

we can argue that this is right or wrong, but it works if you have an allocated good with a serial number.

is it possible they just did somehting dumb? sure. that’s always possible. we all screw up. i have definitely had a few trades like the one you describe. but i’m not so sure this is being portrayed correctly.

• perhaps another part of this issue is that wider distribution is important to the company as well and that such a desire is incompatible with placing bottles where they are valued most.

eg. let’s say that one restaurant would buy the entire vintage and would pay more than anyone else would at auction even for the 600th bottle.

selling ti all to them is the clear profit maximizer.

but if you want to build a community around the wine and value your customer list etc etc you may not want to do this.

this is likely a hobby farm after all.

so you spread the wine around and give no one more than 6 bottles.

this may even be economically rational if we take reputation formation into account. (or it might be nuts, i do not have the info to say)

but if this is the goal (and let’s assume it’s a valid goal for whatever reason based on the desires of the owner) then you will face monstrous flipping and mere price will not stop it nor might it be consistent with spreading the wine around.

it seems to me that the only way to pursue both the spread around and prevent flip goal is by cutting flippers off the list.

were i on the SE list, threats of excommunication would certainly outweigh flip profits in my mind.

it seems like a much more precise tool to threaten “offenders”.

• oh, sorry, in my first auction post i left out a salient:

i was assuming that buyers were limited in quantities as that is how the list for SE works.

if you take out that factor, you might be able to able to find a price, but, for whatever reason, the winery seems to value that as opposed to allowing the buying to be more concentrated. but if you have a limited list of buyers, there is no clearing price that will work.

• Morganovich,

All you’re really saying is that pricing is not easy (granted. If it were, I wouldn’t make so much money) and trying to prevent a secondary market is a fool’s errand.

I understand all the bottles are numbered, but what’s the probability that the winery will be able to adequately police secondary market participants? I think it’s very low. In a black market, how would the vintner even know the wine changed hands?

You don’t have to prevent every flip. If flipping (for whatever reason – and I suspect it has something to do with the illogical hatred of ticket scalpers, given where the owner made his money) causes them so much emotional anguish, then they can significantly reduce the payoff by at least getting pretty close to the price in the secondary market.

Ending all resale, no matter what their logic for wanting to do so, is impossible. Besides, auctioning the wine gives the company valuable market information for their wine.

• it seems like a much more precise tool to threaten “offenders”.

Threats don’t work very well. They’ll just serve to increase the risk for the seller and the market price of the good.

Face it, whether the winery likes it or not, there’s a supply shortage at the price at which the winery is selling its wine. The only way to fix that is to either increase the quantity supplied or the price. I don’t care what they’re aiming to do, those facts don’t change and threats have never fixed a problem of supply and demand, they only drive the market underground.

• we see this in IPO’s all the time. you set a price in an auction, then the trading starts and guys who value it more than the clearing price for the IPO bid it up. sure, not every IPO, but screaming eagle is a VERY hot deal and the allocations are limited per buyer.

You know the underwriters routinely and purposely underprice those IPO’s, right? There are a few reasons for this.

1.) It’s much better to underprice and have the price of the stock go up the day it starts trading. Yay. Success. If the IPO is fairly priced, then it just pretty much sits there or, worse, drops in price if the market is having a bad day. Boo! Nobody is happy.

2.) The underwriters will almost always write in a greenshoe provision which they can exercise at the IPO price long after the IPO has launched. A price increase after the IPO launch = guaranteed profit on the greenshoe.

3.) The IPO shares go to the syndicate’s favoured clients, who receive them at the lower than market price and then flip them right into the market’s eager hands. In exchange for the banks’ generosity, the favoured clients will direct a lot of trading volume to the banks in the syndicate, resulting in hefty commissions for the banks.

• IPO’s are priced for flipping (although, sometimes, for whatever reason, banks try to either pretend they’re limiting flipping or actually limit flipping by instituting a short mandatory holding period). If Screaming Eagle doesn’t want people to flip its wines, it needs to do the opposite of what IPO underwriters do and stop underpricing their wine.

5. Such complicated answers to a simple question. SE claims to be offended by the high prices paid for flipped wines – MP has offered solutions for them. All this crap about Veblen goods and marketing is besides the point.

I had to reread the piece to make sure it said Sauvignon Blanc and not Cabernet Sauvignon. Who pays that much for a white wine that is rarely age-worthy? I know the answer but it is not that the wine is worth the price qua wine.

• Such complicated answers to a simple question. SE claims to be offended by the high prices paid for flipped wines.

I’m not sure it’s the price that matters so much as the horrible reality that someone didn’t treasure it enough to keep it for themselves.

I know the answer but it is not that the wine is worth the price qua wine.

All value is relative, right?

6. If an acre of grapes grown by SE is that productive they should be shopping for other acerage and a second winery. Veblen goods notwithstanding.

7. If an acre of grapes grown by SE is that productive they should be shopping for other acerage and a second winery. Veblen goods notwithstanding.

You are assuming the current owner is interested in growing the business, but as morganovich points out that may not be the case. It may be just a hobby for him, as a prize rose garden might be for those of us who are orders of magnitude less wealthy..