The Pappy Pricing Puzzle

If you drink bourbon whiskey (or even if you don’t) you’ve probably heard of Pappy Van Winkle. Bourbon has experienced something of a revival in the past two decades, after being in decline for much of the 20th century. As part of this revival, some bourbons have become very highly sought after by the nouveau bourbon enthusiasts. And the various offerings of Pappy Van Winkle are arguably the most highly sought after. Finding Pappy is almost impossible these days, though this was also true a decade ago so it’s not really a “new” phenomena.

So here’s the “puzzle” for economists: why aren’t Pappy and other rare whiskies sold at market prices? No one in the “legal” market seems willing to do so. I put “legal” in quotation marks because there is a robust secondary market for these bottles, and the legal status of these sales is entirely unclear to me as an economist (alcohol markets are, to say the least, highly regulated).

In these secondary markets, it is not unusual for a 20-year bottle of Pappy Van Winkle to sell for $2,000. The “manufacturer’s suggested retail price” is $199.99. But you will never find this bottle on the shelf for that price. The bottles are held by retailers, either to sell to friends, auction off for charity, or conduct a lottery for the right to purchase the bottle at well below market prices.

So why doesn’t the distillery raise the MSRP? Clearly, they do this from time to time. Ten years ago, if you were lucky enough to find this bottle it was around $100 (I was lucky enough, on occasion). Clearly, they recognize that prices can increase. And that’s not just “keeping up with inflation”: $100 in 2011 is about $120 in current dollars. By 2016, they had raised the MSRP to $169.99. But why doesn’t the distillery raise the price more, perhaps all the way up to the market clearing price? By doing so, they would, perhaps, be able to ramp up production so that in 2041 there might be a lot more Pappy on the shelf. At the very least, they could dramatically increase their profit.

Receipt for 1 bottle of 20-year Pappy and 2 bottles of 12-year Van Winkle “Special Reserve” from 2011.

Also, why don’t retailers just put bottles on the shelf at $2,000? Stores occasionally do this, but mostly because they are fed up with all of the customers calling about rare bottles. Sometimes they will price it even higher than secondary markets. But usually, they allocate the bottles by something other than the price mechanism. Why? Businesses don’t usually leave dollar bills, especially $1,000 dollar bills, on the table.

The simple answer, which any non-economist will tell you, is that both distillers and retailers don’t want to make customers angry. People don’t like prices to increase! But this is universally true. And for most goods, they are sold at somewhere near the market clearing price.

Yes, there are moral arguments and legal prohibitions against “price gouging.” But price gouging usually applies to essential goods during emergency situations. Bottled water in a hurricane. Snow shovels in a blizzard. As an economist, I might argue against these, but at least I understand the intuition.

But bourbon on a beautiful spring day? What is the argument against charging the market price?

I will admit I do not have the answer to this puzzle. But I look forward to hearing the answers that you have. Please leave a comment!

It is, though, an interesting example to use in class. In microeconomics, I like to go through all of the methods of rationing goods other than using the price mechanism. Pappy Van Winkle seems to have them all (see above), including what I like to call “might makes right” (theft in this case). The only missing method is rationing by “need.” I suppose this is because no one has yet determined who “needs” that bottle the most, but I can assure you that if you should come across such a bottle, I am definitely in need of one because my last bottle of Pappy (currently sitting at a friend’s apartment in New York city) is down to the last two drams.

2 thoughts on “The Pappy Pricing Puzzle

  1. Scott Buchanan May 5, 2021 / 7:33 pm

    I tend to agree it seems to have something to do with the psychology of the whole experience. If they just raised the price to $2000, that would take much of the fun and mystique out of the thing. If you, the end consumer, have to get a bootleg bottle through personal contacts, that makes paying $2k so much more worth it than if you could just buy a bottle at that price off the shelves, along with anyone else who walked into the liquor store.

    And (side comment) all this reinforces how productive modern economies are, that so many people can drop $2K for a bottle of bourbon or for a cruise or for a fancy stationary bike….


    • Zachary Bartsch May 6, 2021 / 12:02 pm

      Night Club Theory & Bundling: If you see a line, then it must be popular. And if it must be popular, then it must be good. Maybe the quality of PVW exceeds the price of PVW as a method of marketing – but for what? Maybe the lines increase the prestige and perceived quality of Buffalo Trace generally. This theory only works if the low PVW price increases the WTP for BT. Maybe BT is the scalable money-maker and PVW has less sales growth in the long-run. But then I’m just spit-balling.


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