demand and price elasticity of demand

Understanding the Business and Economic Environment (MET)

Read the following article and answer the questions that follow.

Bordeaux Wine
Adapted from an article entitled Bordeaux vintners threatened with boycott over high prices, by Adam Sage and Will Pavia, in The Times, March 7th 2009.
Troubles are growing in the wine trade. In the Bordeaux region merchants are threatening to boycott wine from the more expensive châteaux unless the vintners cut their prices to 2002 levels.
Early reports suggest that the 2008 wine now finishing in Bordeaux may yet prove an excellent vintage: rich, confident, full-bodied. The same cannot be said of the Bordeaux vintners who will soon attempt to sell it. The financial thunderstorms of the past six months have wiped out many of those who felt wealthy enough to drink Château La Mission Haut-Brion at £5,500 a case.
Now, in advance of the first tastings of the 2008 vintage, wine merchants are threatening to boycott the entire output of Bordeaux’s most illustrious châteaux unless they agree to cut prices from an average of more than €300 (£265) a bottle to less than €100, The Times has learnt.
Demand for their produce has been faltering since October, when prices for the fine wines plunged by 40 per cent. In Britain, falls at the top of the market have been matched by collapsing sales in pubs and restaurants and a slowdown in business in off-licences and supermarkets.
The vintners of the world’s most famous Bordeaux vineyards were already anxious. According to Sud Ouest, the local daily, warnings of a boycott have pushed many to the edge of a nervous breakdown. The threats come after a bad year for wine investors and evidence that Bordeaux-based merchants have been unable to sell about half the 2007 vintage, which is now considered to have been poor and overpriced.
Merchants contacted by The Times said they would accept 2008 wines when they are put up for sale next month only at 2002 prices – about €95 for the best bottles compared with €318 for the 2007 vintage. “There won’t be any customers if the price is any higher,” a French wine industry source said. “The châteaux may think this is a bluff but it is not.”
The stand-off has cast a shadow over the en primeur sales developed by Bordeaux’s most prestigious châteaux. Under this system, the latest vintage is tasted by critics and purchased by buyers two years before it is bottled and made available to drinkers. A rush to invest in Bordeaux wines in recent years was further encouraged by the success of the 2005 vintage, regarded widely as one of the finest in recent history.
A bottle of Château Cheval Blanc sold for €622 that year, Château Margaux fetched €540 and Château Haut-Brion €472 and their prices continued to rise until the middle of 2008.
“The problem was with the 2006 and 2007 vintages,” said Jean-Christophe Estève, who runs an on-line wine business in Bordeaux. “They were average years – 2007 was an extremely average year – but the prices stayed very high.”
The prices seemed even less realistic as the global economy faltered. The main index of the London International Vintners Exchange, which tracks the value of the world’s top wines across a range of vintages, shows a 14 per cent fall over the past 12 months after a three-digit rise over the previous four years.
Tesco estimated that 100,000 drinkers had dropped out of the market.
Greg Wilkins, a director of Brand Phoenix, a wine importer and brand owner, said: “The ‘on’ trade [wine sold through restaurants and pubs] is suffering most. The ‘off’ trade is reasonably stable although we’re seeing pretty much zero growth.” Difficulties have been compounded by the fall of sterling. “The effect could be further moves towards New World wines,” Mr Wilkins said.

Case study
Prices for bordeaux primeurs: Château Haut Brion 2002, €95. 2003, €192, 2004, €141, 2005, €472: 2006, €450: 2007, €318
Château Mouton Rothschild ’02 €95: ’03, €192: ’04, €145, ’05, €480: ’06, €450: ’07, €318
Château Cheval Blanc ’02, €170: ’03, €253: ’04, €190: ’05, 622: ’06, €622: ’07, €466

Part A
The article documents the notion that a drop in price for Bordeaux wine could increase sales. How does the concept of Price Elasticity of Demand support this strategy?

Part B
Illustrate a shift in the demand curve for Bordeaux wine and explain the likely shift factors for the wine.

Part C
What evidence from the case study supports the notion that the demand for Bordeaux wine has shifted over the period.

Part D
Find out what has happened to the demand for Bordeaux wine since 2009. Use demand theory to explain these changes.

 

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