Monday, July 5, 2010

The Social Premium on Alcoholic Beverages

Ever sit and have a drink at a fancy bar and wonder "why am I paying $8 for a glass of wine?" The answer to this question, of why a glass of wine at a bar might sell for more than an entire bottle of wine at the grocery store, can be uncovered by economic principles.

There are three forces at work here pushing the price up.
1. The extra costs that must be incurred by the bar in order to serve you that drink. In particular, unlike a grocery store purchase, where consumption is a self-serve process, in its pricing, a bar must cover all of the costs of serving drinks, from bartender's wages to dishwashing detergent.

2. Individual drinks are smaller in quantity than what is usually sold at the grocery store, which eliminates the possibility of a quantity discount for a larger purchase.

3. What I call "the Social Premium" on these drinks. This premium arises from the social benefits of drinking at a bar as opposed to drinking elsewhere. These extra benefits to drinkers at bars make it rational for them to pay more per drink. Some of the social benefits may include: Interaction with the opposite sex, a hopping dance-floor, an epic game of pool with a complete stranger, and countless other things that are easier (in economics-speak "less costly") to find at a bar than other places. It's true that one can plan a party to gain these same social benefits with cheaper drinks, but that entails its own costs.

Many of these extra social benefits are not guaranteed to happen. But the mind of the consumer constructs an expected value of all things that might happen, and factors this into his/her decision of whether or not to purchase a drink at a certain price. The greater the customer's expected benefits of purchasing that drink at the bar, the higher the price can go. This logic holds for all products, not just alcohol. Alcohol just provides a particularly useful example of a social premium, because it is greatly associated with social interaction.

A group of economists should get together for a giant pub-crawl and econometrically study the ratio of the price of drinks sold at bars with the equivalent drinks bought from local grocery stores. My guess is that the results would show the perceived possibility of sexual relations to be an important driver of the price. This could be quantitatively studied through such metrics as male/female ratios at different bars. If this does drive the price of drinks, in a sense (and a very cynical sense), many bar patrons are "paying for sex", they just don't realize it.

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