Leveraging Consumer Ignorance and Information Search Costs to Increase Profits in US Wine Flash Sales

Richard B. Belzer Mount Vernon,VA 22121 USA rbbelzer@post.harvard,edu

American Association of Wine Economists 24 June 24 2011 Bolzano-Bozen IT

What is a flash sale?

Retail

platform

Internet/social media/email Impulsive purchase decisions are easy Fixed or free shipping with minimum purchase
Marketing

tactics to increase profit

Large perceived discounts Induced sense of urgency Appearance of scarcity

Some US Flash Sellers

Cellar Thief Cinderella Wine Invino Lot

18 Wine Spies Wines til Sold Out WineShopper Wired for Wine
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Wines Til Sold Out

Tries to be anonymous, but unsuccessfully Billing address shows it is a division of Roger Wilco, Pennsauken NJ

An example of a WTSO sales offer Original Price Yesterdays Best Web Price Our Price (Delivered) Percentage Discount (from Original Price)
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Hypotheses about WTSO

Primary

Inflates release prices to increase the apparent discount (and sales price) Reports ratings selectively to increase the apparent value (and the sales price) Duration of sale has nothing to do with whether the supply is really sold out
Secondary

These deceptions are profitable

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Which Price is the Correct Baseline for Judging the Sales Price?
WTSO Original

Price? Producers release price? Prevailing market price?

How Important Are Ratings?

WTSO Study Data

All

offers made since 15 July 2009

> 2,500 total 422 sales from 15 July 200930 Nov 2009
Date/Time Price

Stamps

Data Ratings

Supplementary Data
From WS, WA, and/or

ST

Release prices Ratings

From

some producers

Release prices Excluded from this analysis because inclusion imparts a US bias

Caveats
Price

and ratings data are seriously incomplete, making inferences risky

2,500+ offers in my database 423 offers in my sample 260 offers have complete price and ratings data; regression analyses are based on this subsample

Unknowns: known

and unknown

Is WTSO representative of the flash sale market? Is the sample representative of WTSO? Is the subsample representative of the sample?
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DISINFORMATION ABOUT PRICE

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Price Statistics
WTSO 'Original Price' ($) N Valid Missing 422 0 $58.00 $39.99 $74.55 Average Reported Release Price ($) 256 166 $59.76 $45.25 $64.83 Prevailing Market Price** ($) 421 1 $46.90 $34.12 $55.19 WTSO Sale Price ($) 422 0 $28.78 $19.99 $31.64

Mean Median Std. Deviation

* As reported by WS, WA, and/or ST. ** Defined as Yesterdays Best Web Price

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Differences Between Adjacent Price Variables

Original Price Release Price Mean Median Std. Deviation Valid N $11.56 $5.99 $29.81 260 Release Price Prevailing Market Price $3.23 $1.16 $15.93 260 Prevailing Market Price Sales Price $18.10 $13.00 $28.27 421

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Average Ratings Reported by WTSO v. Raters Themselves

Average Independent Rating Reported by WTSO Mean N Mean N Mean N 90.9 65 91.8 68 91.4 47 90.7 92 90.6 113 Average Independent Rating 88.3 160

Independent Rater Wine Spectator (WS) Wine Advocate (WA) Stephen Tanzer (ST)

Differences are statistically significant at p < .001

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MISINFORMATION ABOUT PERCEIVED QUALITY

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Number of Independent Ratings Not Reported by WTSO

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Actual Ratings v Ratings Reported by WTSO

Number of Ratings Reported by WTSO 0 Count Expd 1 Count Expd 2 Count Expd 3 Count Expd Number of Ratings Available Total 0 1 2 3 205 64 12 9 290 206 0 0 0 290 1 44 29 18 92 0 110 0 0 92 0 2 16 15 33 0 0 58 0 33 0 0 1 6 7 0 0 0 48 7 206 110 58 48 422
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Total

NOT REALLY TIL SOLD OUT

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Offers by Time of Day

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Elapsed Time Between Offers

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DOES WTSO PROFIT FROM THESE PRACTICES?

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Regression Model
Dependent Variable

= Sales Price Independent Variables

Fixed Effects
Country/State Effects Perceived Quality (Ratings) Prevailing Market Price Producers Wishful Surplus

Test Variables
Disinformation about Price Misinformation about Quality
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Variables Explained
Producers Wishful Profit Profit

Surplus (PWS)

Release Price Prevailing Market Price

from Disinformation about Price from Misinformation about Quality

Original Price Release Price Avg WTSO-reported rating Avg Actual Rating

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Alternative Models (N Vars)

Model I Country/State (12) Perceived Quality (1) Prevailing Market Price (1) PWS (1) Disinformation about Price (1) Misinformation about Quality (1)

Model II Country/State (12) Perceived Quality (1) Prevailing Market Price (13) PWS (1) Disinformation about Price (1) Misinformation about Quality (12)

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Regression Results (1)

Model I Adjusted R2 .961 B Sig. COUNTRY/STATE EFFECTS AR -18.787 .003 AU -3.628 .244 CA [Constant] 5.209 .045 CH -9.902 .319 ES -9.293 .001 FR -.152 .967 IT -.053 .984 PT -4.990 .615 WA 3.015 .764 ZA 1.657 .818 Model II .977 B Sig. -13.182 8.603 -9.661 9.863 15.932 7.803 11.881 .956 .086 .009 .043 .002 .096 .146
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Regression Results (1I)

Model I Adjusted R2 .961 B Sig. PERCEIVED QUALITY EFFECTS Avg Points from 90 2.545 .000 PREVAILING MARKET PRICE Yesterday's Best Web Price, Premium Wines Only Model II .977 B Sig.
.869 -.032 .169 .404

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Regression Results (III)

Adjusted R2 Model I .961 B Sig.
.000

Model II .977 B Sig.

-.127 -.083 .700 -.262 -.289 -.101 .069 .505 .948 .377 .000 .000 .000 .087 .680 .273
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PREVAILING MARKET PRICE ALL .473 AR AU CA ES FR IT PT WA

Regression Results (IV)

Model I Model II Adjusted R2 .961 .977 B Sig. B Sig. PRODUCERS WISHFUL SURPLUS Release Price .724 .000 .573 .000 Yesterday's Best Web Price PROFIT FROM DISINFORMATION ABOUT PRICE Original Price - Release .152 .001 .300 .000 Price

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Regression Results (V)

Model I Model II Adjusted R2 .961 .977 B Sig. B Sig. PROFIT FROM MISINFORMATION ABOUT QUALITY WTSO Rating Actual 2.899 .001 Rating (ALL) AR 6.860 .925 AU -.463 .805 CA .684 .554 CH -3.959 .615 ES .534 .735 FR 10.641 .000 IT .740 .601 ZA -2.622 .635
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Conclusions
WTSO

appears to profit from disinformation about price and misinformation about quality

Profit from disinformation about price was 15-30% Profit from misinformation about quality was > $10.50 per avg rating point not disclosed for French wines only The subsample may not be representative WTSO wines may not be representative WTSO may not be representative
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Caveats

again

Questions and Comments

Richard

B Belzer PO Box 319 Mount Vernon, VA 232121 USA +1 703.780.1850 rbbelzer@post.harvard.edu

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