Valentine’s Day, one of the busiest days for restaurants, is fast approaching. In this episode of Lehigh University’s College of Business ilLUminate podcast, Jim Dearden and Chad Meyerhoefer discuss their recent study published in the Journal of Wine Economics examining whether restaurants charge higher margins, prices, and markups for bottles of wine that they also offer by the glass.
Dr. Dearden is a professor of economics in Lehigh University's College of Business. A specialist in game theory, he investigates economic incentives and contracts, cost-sharing of collective actions, and the economics of college rankings and admission.
Dr. Meyerhoefer holds the Arthur F. Searing Professorship in Economics at Lehigh's College of Business. His research focuses broadly on the economics of health and nutrition. Much of his work involves the use of microeconometric methods to evaluate and inform public policy.
They spoke with Jack Croft, host of the ilLUminate podcast. Listen to the podcast here and subscribe and download Lehigh Business on Apple Podcasts or wherever you get your podcasts.
Below is an edited excerpt from that conversation. Read the complete podcast transcript.
Jack Croft: The study the two of you co-authored, along with one of your Ph.D. graduate students, Ronnie Guo, examines the relationship between restaurant bottle margins, prices, and markups for wines they offer by the glass versus those they don't offer by the glass. What drew your interest in this question in the first place?
Jim Dearden: I like to think about it this way: A restaurant offers an array of items—appetizers, mains, desserts, and drinks. In this paper, how restaurants put together these different pieces of their menus and setting prices sparked my curiosity. Drilling down to think about wine, for a particular varietal-- I'll say Pinot noir. I'm curious about whether a restaurant offering that varietal by the glass affects its Pinot bottle prices, margins, and markups. For customers who are interested in Pinot bottles, a glass or two of this varietal is an option.
So in my work, in general, I'm interested in what economists and marketers call "menu pricing." Airlines offer price quality menus, setting prices according to the location of seats in planes, seat sizes, and legroom. Grocery stores offer price quantity menus with quantity discounts; typically, the bigger the box, the lower the price per ounce, for example. Movie theaters offer price time menus, setting matinee and evening prices differently.
Chad Meyerhoefer: And I'm interested in hanging out with Jim and doing cool economic research that uses unique data. (laughter)
Croft: What are the main findings from your study? Do restaurants charge higher bottle margins, prices, and markups for wines offered by the glass?
Meyerhoefer: It turns out that restaurants do, in fact, increase the price of bottles for wines they offer by the glass. It's about a 5% increase. But what's even more interesting than that is when you look at the margins of those bottles, they're 12% higher when the restaurant offers the wine by the glass.
Croft: What's the difference between the margin and just the price itself?
Meyerhoefer: The price is what the consumer is paying the restaurant, whereas the margin is the difference between what the consumer pays and what the restaurant pays the wholesaler for the wine. So, essentially, the restaurant is acquiring the wines it sells by the glass at lower wholesale costs, but it's not passing those costs on to consumers. It's keeping that. Whereas when the wine is only offered by the bottle, it's more likely to pass those savings on to consumers.
Croft: Jim, it seems at first blush, if you will, that raising the margins and markups for bottles of wine that customers can also buy by the glass is somewhat counterintuitive. So if you could explain the thinking behind that, and, also, what the study shows about the role that the wholesale price of a bottle of wine generally plays in how much restaurants sell it for by the glass.
Dearden: I think about this in terms of segmenting markets. If the restaurant offers the wine only in bottles, then it's not segmenting low- and high-willingness-to-pay customers that it could do if it offered by the bottle and by the glass. So it's lumping them all together when it offers only bottles. And in doing that, it wants the price to attract at least some of those low-willingness-to-pay customers, so it's setting a lower price.
When it offers the wine by the glass, the restaurant's segmenting customers. It's putting low-willingness-to-pay customers in the glass group, so they're buying wines by the glass, and then the high-willingness-to-pay consumers are buying the wines in bottles. And those customers willing to pay more, restaurants are raising the price on them a little bit.
Now our other finding, which is interesting, is that controlling for the quality of the wine—controlling for a Wine Spectator rating, which we used in our study—what we found is that restaurants that acquire wines at lower prices, they offer those by the glass. So lower wholesale prices, they offer them by the glass, but the wines that they acquire at higher prices, they offer only in bottles.
So what we have is these lower-wholesale price wines being offered by the glass, attracting these lower-willingness-to-pay consumers, and the higher-priced wines—again, controlling for quality—offered only in bottles. And they're kind of attractive—they’re there for everyone, because the wine is not being offered by the glass.
Croft: For all those who are planning to order wine with their meal at a nice restaurant this Valentine's Day, what should they keep in mind in making their decision of whether to order by the glass or the bottle? What advice do you have for our Valentine's Day diners?
Meyerhoefer: I'm going to start out with some very practical advice, and that's if you're not a regular wine drinker, but you want to order a glass of wine for a special occasion like Valentine's Day, then it's best to choose a restaurant that has upscale decor. Because we found in our analysis that the restaurants that are nicer inside—that have a higher-end decor—are more likely to offer wines by the glass than restaurants that aren't.
And the other thing I would say is to be adventurous, at least if you want to save some money, because if you start out [with] one wine by the glass, you don't want to then say, "Oh that's a great wine. We'll take a bottle of that." What you want to do is you want to choose a different bottle that's similar to the one you tried by the glass, because you know that if you order that same wine by the bottle, you're not going to get the savings that, essentially, the restaurant acquired. So the restaurant's going to make more money off of that bottle, as opposed to if you choose a different bottle.
Dearden: My advice is a little different. For Valentine's Day only, do not pay attention to the results of our paper. Rather, if you're selecting the wine, choose one that will please your date.