Monday, February 18, 2013

The power of the market and price discrimination*

About a week ago the makers of Maker's Mark whiskey (of which I am a fan) announced that they were going to dilute their product from 90 proof to 84 proof. The reason this was needed is because it takes 5 - 7 years to age Maker's Mark and demand has increased since 2008. Rather than raise the price, a common remedy for a shortage, Maker's Mark instead intended to increase supply. That did not go over very well with many customers and Maker's Mark has since reversed course. This is an example of consumer sovereignty, a term I teach in my ECON 211 class, or more simply as the market has spoken.

There was a another option for Maker's Mark though, pointed out by Tim Worstall of Forbes. Not sure how it would have worked out but he is certainly thinking like a profit maximizer when perhaps the executives at Maker's Mark were not.

*Though Mr. Worstall  refers to his idea as price discrimination it is really nothing more than introducing a new product to the market to meet a subset of the demand. Selling 90 proof Maker's Mark to different people for different prices would be price discrimination.

3 comments:

  1. The title of your post includes price discrimination, yet you say nothing about it in the actual content.

    All I see are Maker's Mark trying out two different options to meet an increase in demand. No p.d. Involved.

    ReplyDelete
  2. I see your point. Price discrimination is not the best term to use here. They are simply creating a new product. Thanks for the comment.

    ReplyDelete
  3. Yeah I was actually more commenting to the article than the post. One other thing I disagree with what the Forbes guy said is this:

    Maker's Mark is owned by Beam, which is publicly traded. So, for starters, I think they know a little better than some journalist about how to maximize their profits since they have to answer to shareholders.

    Second, Maker's Mark is a well-known bourbon, and if you go changing the price drastically across consumers and locations you'll easily anger returning customers. That is why changing the alcohol content created such an uproar; it would be like McDonalds changing their hamburgers to veggie burgers.

    ReplyDelete