Older is Better?

In the world of bourbon, older is better. As the bourbon ages, its taste becomes more flavorful and unique. This better taste allows firms to charge a higher price for the older bourbon. Another characteristic of bourbon that determines its price is the brand. Higher quality bourbon, such as Bulleit and Jim Beam, is priced higher than brands that are viewed as lower quality. In recent years, the quantity demanded for expensive bourbon has exceeded the quantity demanded for cheap bourbon. This increase in demand has led to many interesting consequences for bourbon distillers.

One aspect that needs to be considered in this shift in demand is the supply of expensive bourbon. As previously stated, the amount of time the bourbon is aged influences its price. The shift in demand for more expensive bourbon means that consumers desire bourbon that has been aged for long periods of time, usually a decade or two. Distillers are not able to plan for these demand changes a decade in advance. This means that there is only a small quantity of bourbon that has been aged for long periods of time. The increase in demand and decreasing quantity available for sale has driven up prices drastically.

Another aspect of the bourbon industry that this trend highlights is the importance of a brand. Very few consumers drink bourbon every day. It is usually consumed only for special occasions. Since it is not consumed normally, a person drinking it would want to particularly enjoy the experience.  Therefore the consumer would desire to have a high quality product with a good taste. They might also desire to impress the people they are drinking with by having bourbon with a brand that is deemed “high quality.” Both of these behaviors can be described by the Veblen effect. This theory states that consumers attribute certain levels of quality and status.

Distillers of bourbon have many decisions to make in order to maximize profits. Should they increase prices of already highly priced bourbon to take advantage of the demand shift? Will they begin to increase the quantity of bourbon that they age for long periods of time or do they view the demand shift as a trend? The CEO of Diageo Distillery sums it up best: “We don’t want people to drink more, we need them to drink better.”

http://www.businessweek.com/articles/2013-11-26/bourbon-sells-and-pricey-bourbon-sells-even-better#r=nav-f-story

3 thoughts on “Older is Better?

  1. Do you think that increasing price would increase demand after a certain point, since consuming high end bourbon is a matter of status? Or is it possible that the increase in price might harm the illusion of scarcity? For example, in the diamond trade the prevailing fear is that an increase in price might change consumer perceptions about diamonds, thereby harming the market.

  2. How much does price increase influence demand? Is it so extreme that an increase in price increases demand, or in other words, is bourbon a giffen good?

  3. Costs associated with aged whiskeys opposed to the costs of producing more, but less-expensive whiskey intuitively seems much lower. Storage and maintaining optimum environment seem to be the costs associated with aging whiskey. Producing large quantities of lower-quality alcohol requires more resources and has lower profit margins. Selling a higher-quality product can be more lucrative if demand can be maintained.

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