Supply and demand for fine wine

Supply and demand in one paragraph

Supply is how much of something is available to buy. Demand is how much people want to buy at each possible price. When lots of people want something and there is not much of it, sellers can ask more and still sell out. When there is plenty and few buyers, prices fall. The market price is roughly the point where the amount people want to buy matches the amount on offer.

Concert tickets show it well. A stadium has a fixed number of seats. If a hugely popular band plays one night only, resale prices for tickets can climb far above the face value printed on them, because the seats cannot be multiplied.

Why the top can rise while everyday wine does not

Everyday wine is a very different market. If more people want a cheerful red, producers can plant more vines, buy grapes from more growers, or ship wine in from another country. Supply responds to demand, so prices stay fairly steady. In fact, global wine consumption has been drifting lower in recent years, and some regions, including Bordeaux, have paid growers to pull up vines to reduce a surplus.

A top grand cru cannot do that. Its vineyard is fixed by law and by geography. Economists say its supply is inelastic: it barely changes, whatever the price. When demand rises against an inelastic supply, nearly all the adjustment happens through the price. That is how the same country can have too much ordinary wine and not enough of its most famous bottles at the same time.

Price as a way of sharing things out

Whenever there is not enough of something to go round, some rule has to decide who gets it. Economists call this rationing. There are only a few ways to do it: first come, first served (a queue); a lottery; loyalty, where regular customers go first; or price, where the bottles go to whoever is willing to pay most.

Each rule has winners and losers. A queue rewards people with free time. A lottery is fair but random. Loyalty rewards long-standing customers but shuts out newcomers. Price rewards people with the most money, which can feel unfair, but it has one big advantage: it tells everyone how much the item is really wanted, and it encourages owners who value it less to sell to those who value it more.

Fine wine uses a mixture. Producers often sell their new wine through loyalty systems such as mailing lists and allocations, which the next chapter explains. But once bottles leave the producer, the resale market rations them by price. That is why the same wine can have a modest release price and a much higher market price at the same moment: two different rationing rules are working side by side.

The gap between them creates a temptation. Someone lucky enough to buy at the release price can often sell on at once for more, just as a fan who gets a face-value ticket might resell it. Many producers dislike this, and some will drop customers they suspect of reselling.

The resale analogy, and where it breaks

Fine wine has a lot in common with limited sneakers or rare trading cards. The first owner buys at a set price, the item becomes scarce, and a resale market appears where prices are set by whoever wants it most.

But wine differs in important ways. It can spoil if stored badly. It is heavy, fragile and expensive to move. Its quality changes over time, for better and eventually for worse. And it is meant to be consumed, which is what makes the supply shrink in the first place. Those differences add costs and risks that a card in a plastic sleeve does not have.