Exploring Price Perception

By Karl Klooster

It is said the mind works in mysterious ways. To determine just how true that statement is, researchers at the Stockholm School of Economics decided to conduct a controlled test using wine.

Researchers Johan Almenberg and Anna Dreber released a detailed report outlining their methodology, procedures and conclusions on April 19, 2009. They called the study “When Does the Price Affect the Taste? Results from a Wine Experiment.” They could have devised a study using any number of commodities. But wine, referred to as “the good” in their report, carries with it quite an intriguing, if sometimes intimidating, mystique.

Taste preferences in wine being both subjective and elusive, it’s a beverage capable of eliciting a wide disparity of opinions. As a good produced and imbibed worldwide, which can be a very good “good,” indeed, it also attracts considerable interest.

Academic types like Almenberg and Dreber are inclined toward technocratic terminology. Liberally sprinkled throughout their report are such terms as demand curves, within-subject correlations, costly signaling, extrinsic information and joint regression.

The authors would undoubtedly assert that such expressions lend precision to what is being set forth; whereas this may be praised by others who regularly communicate in like-jargon, it requires some interpretation for the rest of us.

Following is an effort to distill the 12-page report by focusing primarily on the conclusions rather than the lengthy descriptions of how they arrived at them. It’s also noteworthy that the blind tastings took place in Massachusetts, not Sweden.

The stated purpose was to examine “how knowledge about the price of a good, and the time at which the information is received, affects how the good is experienced.”

The experimental setup consisted of three settings: 1) blind tasting and rating with no information given; 2) price information given before tasting and rating; 3) price information given after tasting and rating.

Two wines were tasted. One expensive, the other cheap. Tasters were asked to assign a rating, using a visual analog scale, ranging from “undrinkable” to “perfection” with “OK” as the midpoint. Marks along the scale were converted to points from zero to 100.

A total of 135 tasters (40 percent women) rated an expensive ($40) red wine and 131 tasters (33 percent women) rated a cheap ($5) red wine. Both wines were from Portugal, an odd choice given that country’s relative lack of premium, dry red table wines.

The upshot was that the cheap wine actually received a slightly higher overall cumulative point total than the expensive wine when price was unknown.

Having had very limited exposure to Portuguese reds, I can’t speak for the quality variations among them. The ones I have tasted all retailed for $10 or less and, though competently made, displayed rather simple, undistinguished attributes.

But having, for example, tasted many Cabernet Sauvignons, Pinot Noirs and Syrahs from California and the Pacific Northwest, I find it almost impossible to believe that $5 bottlings would come close to matching, much less outdoing, $40 ones.

Perhaps more valuable was the finding that when the price was disclosed before tasting, women gave the expensive wine a substantially higher rating. Disclosing its cheap price before, however, did not significantly lower that wine’s rating.

Learning the price after tasting had a marginal effect only on men, some of whom lowered their rating of the cheap wine.

From a marketing standpoint, the authors conclude that price does influence both expectation and enjoyment. Even if the cheaper wine is actually better by absolute standards, elevated social status is associated with the more expensive wine.

Now if this isn’t a mindgame, I don’t know what is. For me, and I know for many others who regularly drink wine, finding ones that are really good at modest prices is the goal. That’s our version of a status coup.

As for the tasting results of the experiment, the apparent inability of these 266 individuals to discern a difference in quality, with or without price information, poses some serious questions.

I don’t know about you, but over the course of 35 years, I’ve done enough blind tasting—on judging panels, in private groups and alone—to say with confidence that quality-level differences are fairly readily perceived within the broad parameters of below average to average, average to good, and good to very good.

Experience also tells me a group of tasters whose knowledge ranges from novice to professional consistently reaches consensus on which wines they like best regardless of price; that is, there is a widely shared perception of quality.

When it comes to agreeing upon the best among the very good, however, differences of opinion are more likely to arise.

I also find it difficult to believe that $5 wines are generally liked as well as or even preferred over $40 ones. That just doesn’t compute. A cheap wine is cheap for a reason. Winemakers know what does and doesn’t go into what they’re producing.

When trying to determine whether or not a wine that’s very good and sells for $30 is any less good than a wine that’s also very good and sells for $100, there’s a dilemma. Especially when the tasters know what the wines are and how much they cost.

The argument becomes even more nuanced when, say, a $10 wine is compared with a $25 one. In the end result, it boils down to trying a lot of wines in the price range you feel comfortable with and finding the ones you like best.