Sunday, March 1, 2015

Supply, demand, and decoys

If you've made it this far down your blogroll, you've probably already seen Chuck Cowdery and Fred Minnick argue pro and con -- or rather, con and pro -- on the question, "Resolved: There is a bourbon shortage." (For me, the saddest part of this story is that Fred Minnick has a company; I kind of wanted to believe he made his living just by drinking whiskey.)

You've probably also seen Chuck's Minitrue followup on why the bourbon shortage we aren't having means more bourbon for everyone. In that piece, he links to Professor Cocktail's explanation of the elementary economics behind the bourbon shortage:
The reason that there is a shortage of particular types of bourbon is because they are generally sold at below-market prices.... Were the distillery/distributor/store to raise the prices of these bourbons, the surplus would disappear and an equilibrium price would eventually be reached.
In other words, all those SOBs who have been asking you what your favorite bourbon is have gone off and stocked up on it. If they went to the liquor store the week after the price was raised ten bucks, then that higher price is their own personal baseline. While you wince and hesitate, remembering those carefree prices of yesteryear, they brush past you and grab the last bottle.

Add to that the decoy effect of the higher price-point expressions.1 Suppose you go to the store and see Old Commonwealth Straight Whiskey for $30. It's a decent drink, you like having it on hand, but $30 is near the upper range of its value to you. You still have half a bottle at home, so you pass on it today.

Next week, events conspire to send you to the liquor store again, and you see the same whiskey for the same $30. But you notice that Old Commonwealth Reserve, which you've always found a bit syrupy, went from $45 to $50. Suddenly $30 doesn't seem like such a bad deal for a baseline OldCom. In a sense -- not common sense, but a sense nonetheless -- they've sort of lowered the price, haven't they? At least relative to the fancier expression. And when prices go down, demand goes up.

The decoy effect, I'm told, operates regardless of what people think might happen tomorrow, so there will be less OldCom on the shelf by the end of today. Add in the price-aware consumer, who knows whiskey prices are inflating, who foresees an OldCom price hike to match the OldCom Reserve's -- call it gouging if you like, if they can now sell OCR for $50 then OC probably is below market price at $30 -- and buys one or three bottles to bunker.

See? Plenty of whiskey on the shelves!
All of the above is typical (if not economically rational) consumer behavior. Bourbon availability is also affected by plenty of just plain nuts behavior, from more-money-than-sense newbies as well as panicky survivalists clearing out stores when they see something they don't expect to see a month from now. Dirtbag flippers and scuzzballs in the distribution chain help keep the top of the market sailing up out of sight, triggering the decoy effect followed by price adjustments in the undercard. Breathless reporting pumps oxygen into the fire.

So yes, both plenty of bourbon on the shelves and less than there used to be of what you want to drink for what you want to pay. Simple economics meets human nature.

What can you do about it? You can try to figure out your budget and what you're willing to pay before you go to the store, then stick to it (yes, yes, the preacher preaches to himself; I'm working on it). If you're in the has-more-whiskey-than-can-be-drunk-in-a-lifetime boat, you might drink your whiskey (sorry, didn't mean to shock you, sit down until the dizziness passes). You can start telling people your favorite bourbon is Distiller's Pride ("I know, I know, but for the price!"). You can make your peace with the fact that your thing is the hot thing right now and try to muddle through as best you can until the rum or tequila boom overtakes the whiskey boom.

Personally, I'm preparing a tuck-and-roll landing onto the apple brandy field. So far, the best I've found for the price is Hiram Walker.

1.The decoy effect makes Option A look more attractive than Option B by introducing an Option C that is unattractive compared to Option B but even less attractive compared to Option A. In this case, Option B is "anything other than Old Commonwealth Straight Whiskey." Is that a legitimate example of the decoy effect? I don't know, maybe. The point is, it sounds cool. Also, never learn economics from some hack whiskey blog; that's what Wikipedia is for.

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