Schrader: What It Means to Be a (Wine) Libertarian

Posted by | Posted in Wine News | Posted on 01-10-2011

As a recovering economist, I was heartened to read the other day that Fred Schrader is going to sell some of his current release at auction!

For those that don’t know, Schrader is the current talk of the (new) wine world as its Old Sparky and CCS cabs have received perfect 100-point scores from Robert Parker three years running now (2006, 2007, 2008). Schrader is owned by Fred Schrader and the winemaker is Thomas Rivers Brown (check out his Rivers Marie label if you want some more bang for your buck). Schrader is monomanically focused on Cabernet Sauvignon. The winery makes six wines and all showcase different sections of or different clones from one of the all-time great Cabernet sites on the planet – the Beckstoffer To-Kalon vineyard in Oakville.

Some, likely those stuck on the Schrader waiting list, are dismayed that the winery has held back some of its 2008′s to sell at auction. Surely if they have more wine they should allocate it to the patient, passionate, die-hard Schrader fans who have been twiddling their thumbs for years in anticipation of wine, right?

For those who aren’t Econ wonks, a quick intro to micro-economics — a free market that lets supply and demand set prices without artificial interference is the ideal way to allocate scarce resources (or so Milton Friedman and his Chicago disciples propound). The theory asserts that high prices will encourage more supply to be produced. And those that are willing to pay the most will be allocated goods that are in scarce supply. This is how Adam Smith’s invisible hand makes sure that things, all of which are inherently scarce to some degree, go to their highest and best uses.

Why should wine be any different? Why should Schrader only be available to those who were savvy or fortuitous enough to sign up years ago on the winery’s mailing list? Wine, especially good wine, is scarce. Shouldn’t it go to the people who value it most? And, if the market sets extremely high prices then that should encourage Schrader to produce more wine. Obviously quality will suffer if they produce more, but the market will figure that out and adjust the price. And then it will be up to the producer to figure out the optimal balance between quantity and quality such that profits are maximized. For what it’s worth, high end Bordeaux has essentially been sold for decades via futures at the highest price the market is willing to bear.

Academics have written extensively on inefficient methods of allocating other scare resources. Examples include concert and sporting event tickets and initial public offerings (IPOs). Concert tickets are often “scalped” for significantly more than face value. Why do promoters and performers allow this to happen? If tickets are being sold in secondary markets at premiums to face value then the performer left money on the table; he or she could have charged more in the primary market and sold the same number of seats! Similarly, Wall Street investment banks tend to price IPOs such that they experience a first day “pop.” Why do they do this? Their client is the seller of the stock and their goal should be to maximize proceeds from the IPO. If the stock increases on the first day of trading then clearly there was more demand at the offering price than there was supply and the investment bank could have sold the IPO at a higher price!

I know wine is a unique, living thing made by passionate producers who toil for years at their craft. And for that I love it. But sit back for a minute and think of wine like any other scarce resource in the world – it’s totally fair (and economically efficient) for Fred Schrader to sell his wines at auction. So if you want some, then go out and buy it – it’s a free market. And if you think the auction is going to clear at some astronomical price (as I do since the auction is taking place in Asia) then sit back and watch the fireworks.

To be fair, there is another side of this debate. It could make perfect sense for some vintners to sell their wine solely to a mailing list in violation of the free-market dogma I’ve espoused. By selling to a mailing list at reasonable and relatively static prices, wineries build loyalty. Yes, Schrader will likely be able to sell its 2007 and 2008 production at eye-popping prices. But what happens in several years time if the wine isn’t as good? What happens if Robert Parker gives the wine a measly 90-point rating? The clamor for the wine (at least for these lower-rated vintages) will decline and Schrader will be stuck selling its wine at significantly lower prices despite having invested the same substantial amount of time and money in the product. Businesses are easier to run when demand and pricing is predictable and stable – selling to a dedicated, loyal mailing list is one such way to create calculable and reliable demand!

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