Question

F6: The Logic of Individual Choice 28 28 unread replies. 28 28 replies. Joseph Gallo, the founder of the famous wine company that bears his name, said that when he first started selling wine right after Prohibition (laws outlawing the sale of alcohol), he poured two glasses of wine from the same bottle and put a price of 10 cents a bottle on one and 5 cents a bottle on the other. He allowed people test both and asked them which they wanted. Most wanted the 10-cent bottle, even though they were the same wine. What does thus tell us about people? Can you think of other areas where that may be the case? What does this suggest about pricing? Is the rational choice theory still applicable in this case?

name of the book: Economics 9th edition

IT MUST BE 250 WORDS VERY IMPORTANT PLEASE

Answer 1

In the experiment, even though both bottles had same wine, consumers were willing to choose the costlier wine. This is because, when the marginal increase in costs (along with the low base value) is low, consumers tend to believe that the costlier item has better quality. This logic is also used by many brands to sell their products at premium prices. For example, the branded shirts that we wear are actually woven by the laborers in developing countries like Bangladesh. A local brand may actually be using costlier labor in its own country. Even though the price offered of shirt is lower for local brand, we choose the luxury brand assuming the quality will be far superior. However, the difference is only in terms of marketing.

The place or distribution channel is also relevant for pricing. For example, consider water bottles. The same water bottle, which may be available for 20 cents locally would be available for $2 in a mall. This is because the firms are aware that the people here are willing to spend a high amount for same items.

This is not opposite to what is expected in rational choice theory. Here, the consumer is willing to pay higher price for same good, which may seem wrong. However, because of the price, the consumer's mind is perceiving higher quality. The induced perception, leads consumer to value the good at higher level, as it is giving her higher satisfaction. Hence, this is actually in line with rational choice theory.