Champagne is a very good example of a luxury good. (a change in income causes a bigger % change in demand) Furthermore, supply of Champagne is limited to certain regions of France. With this monopoly power over supply, French wine producers have been able to set very high prices. Champagne can easily go for over £100 a bottle. But, several years of over supply combined with the current recession is causing wine merchants to consider selling Champagne at knockdown prices.
Exports of Champagne to Britain fell 45% in the first 6 months of this year. This is a classic example, of how in a recession, people avoid expensive luxury items and choose cheaper alternatives.
If we assume income fell by 4% this year, a 45% fall in demand gives an income elasticity of demand of approximately 10.
The problem for wine merchants is that they have a dilemma.
- They have so many unsold stocks, the law of supply and demand suggests they should reduce prices to perhaps £10.
- But, if they do reduce prices so much, Champagne may lose its lustre as being a special ‘luxury good’. It’s like being able to buy Levi Jeans in Tesco for £10.99. Levi would lose their brand image for being special. If Champagne is sold for £10, it will be harder to command those high prices when the economy recovers.
see: Times Article – Vintage Champagne could be £10