Thursday, June 25, 2015
The Economics of Scarcity
Today I was on Vermont Public Radio's "Vermont Edition" talking about the economics of craft beer. [Here is the link to the audio - my bit starts at 32:10] All good fun and thanks to the good folks at VPR for having me as a guest. They did throw me a curve ball, however, as they had told me to expect for the conversation to be focused on the Heady Topper phenomenon. The Alchemist's Heady Topper, as you may know, is one of those 'it' beers in the craft beer enthusiast world - you simply have to try it if you are a self-respecting enthusiast. And so the buzz is created and people do crazy things to get their hands on some.
Another similar beer for left-coast folks is Pliny the Elder, the Russian River creation that is similarly a buzz beer and has been for a remarkably long time. Both beers are big double IPAs, both are very good (though I can only vouch for Pliny the Elder personally - but I have it on good authority that Heady Topper is similarly wonderful), and both are extremely scarce.
So how does the fact that it is scarce contribute to the popularity and demand for the beer? Well there are a number of economic factors that come in to play. The first is that since beer is an experience good (a good you cannot put a value on without actually trying it) you have to look for signals of its quality. I have talked before about how price can be a signal of quality, and so can visible excess demand. If people are willing to drive hundreds of miles and wait for hours, it must be an exceptional beer. So scarcity can actually drive up demand.
Psychology also plays a factor as well: it turns out that scarcity/excess demand can actually cause you to enjoy the good more. If you believe the good is exceptional it actually changes the way you perceive it and you are more likely to think it is excellent. In economics terms, you get more utility from drinking Heady Topper simply because it is scarce!
Finally, buzz is still a mysterious and perplexing thing to economists (despite lots of fancy modelling with information trees, information cascades and the like) but it is elusive and when you have it it is hard to maintain it. One way to maintain it is to keep the good scarce and so scarcity has another benefit it that it can sustain the demand for a good.
Having said all of that, I don't think in either The Alchemist or the Russian River Brewing case there is a master play to maintain scarcity. In many cases, the allure of making a profession in craft beer is the ability to be a small businessperson doing something you enjoy and can share with others while feeding your family. They are not out to maximize profits but their own utility. But if they were crass capitalists, either one could have the beer contract brewed in mass quantities and flood the market for a quick payout (or more likely these days - sell the brewery to a big conglomerate or venture capitalist firm). However, this would likely be self-defeating in that the scarcity would be gone, the mystique of the beer shattered (let's face it, we are spoiled for choice with exceptional big IPAs these days) and the buzz that surrounds the brewery name lost.