Monday, February 8, 2016

Signalling With a Bottle

If you didn't know anything about the beers, which one would you assume is the lowest quality?


I am sure I have written about this before, but I am too lazy busy to look, but this New York Times article about craft breweries move to bigger bottles seems to resonate with the economic theory of signalling.

In the signalling theory it is the act of signalling itself (thought replicable by anyone) that provides credible evidence of quality. 

The classic example is in education:  One reason we go for higher degrees is to demonstrate that we are smart and productive workers to would be employees.  We can show them a college degree, for example, and from this they can take away that I must be a  high 'quality' worker.  Why? Well it is not the stuff I learned necessarily but that getting a degree is costly, it takes time and money.  But it is MORE costly for less smart and motivated people because they make take longer, have to study harder and so on.  In equilibrium it turns out that the degree is indeed a signal because only the smart productive types will bother to get them.  The lower types will not because if they do they will have wasted time and money because once they join in the degree getting crowd, the degree is no longer a singal of quality.

[Clever theory eh? Clever enough to win the Nobel prize...]

What does this have to do with bottles?  Well, suppose that bottling in fancy bottles with corks and foil and stuff is more expensive.  Good breweries want to signal their high quality by packaging their beer in fancy bottles.  Bad breweries would like to do the same.  The problem is that bad breweries face the exact same cost of sticking it into a fancy bottle (and even the premise isn't always correct - a simpel 22oz bottle is cheaper to sell beer in than a 12 ounce bottle).

So signalling alone doesn't explain this but the idea of experience goods can potentially reconcile the theory.  Since beer is a repeat purchase, consumers are quick to learn abut the type.  So packaging in a fancy bottle might work once, but not over time.  In the end the low quality brewers abandon the big more expensive bottles because they are not fooling anyone anyway and it is more expensive, while high quality maintain it because after the low quality ones leave a fancy package is, in fact, a credible signal of quality. 

The subtle point in all of this is that these are equilibrium outcomes - that in the end there is an equilibrium where high quality brewers choose fancy bottles and low quality brewers do not and both are content with their decisions. 

For me though, I tend to concur with the big bottle critics: I am the only beer drinker in my household and thus I cannot buy more than 12 ounces of a big beer without wastage (of either the beer or me). 


The Oriole Way said...

It's also a great market segmentation tool. I have a brewer friend who points out he can sell the exact same beer in the exact same store for more money per unit in the big bottle than the little bottle. His beer runs $9.99 for a 6-pack and $4.99 for a 22-oz bottle (east coast, yay!).

Pivní Filosof said...

"Since beer is a repeat purchase, consumers are quick to learn abut the type. So packaging in a fancy bottle might work once, but not over time."

I'm not so quite sure about that. If the wine market is any indication, there are still a lot of people out there to be fooled (most people don't know anything about beer) and there are also many others who will believe that something pricier in a fancier packaging is better, even if you and I might think otherwise.

Patrick Emerson said...

Oriole: Yes but the segmentation only works if the big bottle represents something else other than the 22oz of beer inside. Could just be a convenient package...

Pivní: this is especially true the more and more 'soecial' one-off beers. Given the association with 12oz servings (in the US - 350ml in the civilized world) it would surprise me to see a 'special' beer in a 12oz/350ml bottle.

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Alex said...

Nope....I disagree. Pivni Filosof (in his commentary) is right - there are hordes of consumers out there whose impression of a product will be shaped by the packaging. Maybe the trial purchase will be the first and the last for a beer that is utterly bad, but when a brew is just mediocre and not shockingly inferior to the expected standard repeat purchases are a very possible thing.

Many, tens of thousands of people buy a beer when they like a bottle, the diversity of designs is staggering and the bottles' looks constitute the more readable signal to buy or not to. Tens of thousands of people drink crafty beer today, it's impossible for every one of them to be an expert with elaborately developed and finely tuned palate, "beautiful bottle" with a beer that is in a style that's among these en current vogue is a way to make oneself happy with a purchase and impress uninitiated.

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