Here is the information you need to clear a room this Christmas: economic rent arises from differentiation and migrates to wherever in the value chain scarcity is found. Or you could always drink a glass of champagne instead.
When a reporter asked John Maynard Keynes whether there was anything in his life he regretted, he replied: “Not having drunk enough champagne.” Keynes – bon viveur, polymath and great conversationalist, a person you would welcome at a party – was an exception among economists. While most people see in champagne flutes the bubbles and the reflection of radiant faces, my colleagues think of marginal cost and marginal revenues.
Here is the information you need to clear a room this Christmas: economic rent arises from differentiation and migrates to wherever in the value chain scarcity is found.
Champagne was not invented by the monk Dom Pérignon or the Widow Clicquot. But these individuals were energetic promoters of the brand. The Moët et Chandon company made the brand a favourite in Victorian England, even sponsoring a music hall artist called Champagne Charlie. The association of champagne with luxury was the result of the promotional activities of those grandes marques of Rheims and Epernay.
Champagne is made of grapes, mostly Chardonnay, grown on the flinty soil of that region and gains its bubbles from secondary fermentation in bottles. Similar wine can be made in some other parts of France, such as Alsace, and in temperate areas of Australia and the US. But champagne fulfils the characteristic of a powerful brand: many consumers prefer a bottle of champagne to a functionally equivalent product.
At the bottom of the market, this results in a substantial price premium: almost no champagne retails below €15 a bottle but most sparkling wine sold is in this price category. At the top, competing producers resign themselves to small volumes. As in other markets with strong brands, the branded product is not intrinsically superior, but the market operates in such a way that the branded product is, on average, of better quality than its generic rivals.
Woodrow Wilson’s failure to persuade the US Senate to join the League of Nations had effects on the champagne market that outlasted the League itself. Keynes made coruscating criticism of the treaty of Versailles in The Economic Consequences of the Peace. He did not refer, however, to the treaty’s petty, vindictive attack on German wine growers that rewrote international agreements on wine labelling. America’s failure to ratify the treaty meant failure to recognise the legal status of French champagne. In 1921 it was illegal to sell champagne in the US under any label so this did not matter much, but today the growers advertise extensively to persuade readers of The New Yorker and Vanity Fair that only the French product is the real thing.
Outside the US, protection of the name champagne creates the maximum economic rent and everyone associated with the business struggles to maximise their share. Retailers used to make good margins on a commodity they thought prestigious rather than price sensitive, but competition has driven these down. Governments get their share – Gordon Brown, chancellor, takes an extra 40p from every bottle of sparkling wine. But the toughest battle has been between the grandes marques and the growers who supply them.
The companies that created the brands for long dominated the market. But globalisation, the growth of powerful retailers and the enterprise of some growers made it possible to sell champagne directly to consumers – look for unknown or own brand labels on the cheaper bottles on the supermarket shelves. The argument between growers and grandes marques led in the 1990s to an attempt to satisfy both by pushing up prices to consumers, fed by absurd projections of increased demand for champagne for millennial celebrations.
Champagne lost ground both absolutely and to other sparkling wines and an accommodation was reached in which growers achieved a greater share of the brand premium. Rent has increasingly accrued to the truly irreproducible factor: the price premium between land in the champagne district and similar agricultural land a few miles away.
Of course, you could always just enjoy a glass or two.