(SVBWine) - I'm betting nobody knows who Thorstein Veblen is. Like this picture, you have to be a little cockeyed to know him; be a Jeopardy Champion, enjoy thumbing through pictures of people who look like axe murderers, or maybe you are an economist with little to do with your free time except refresh your memory about a Veblen good?

One on-going debate in the wine business where Veblen's theories play a role is price discounts. Should you discount, and if so when and by how much? To get at an answer we'll review some economic basics. (... I know how exciting that sounds but stick with it. I won't kill you with math.)

The Rolling Stones Know Veblen

Normal goods are those goods that when income increases, demand increases. Inferior goods are those goods which when income increases, demand decreases. Inferior is not a statement of the good's quality, only the relative direction of negative change when income increases. Wine as an industry product has both normal and inferior properties. During recessions, we see "trading down" of more expensive wines into wines of lesser price. When income increases as we are seeing today, the opposite happens and we see "trading up."

With a luxury good, as income increases, demand for that good increases proportionally more. A Veblen good is a special kind of luxury good like some perfume where a decrease in price can lead to a decline in demand ..... which seems to go against conventional economic wisdom. Nonetheless, some luxury goods perform just that way .... and without getting into a discussion of the marginal income elasticity for the wealthy class, when it comes to discounting luxury, superior and Veblen goods, consider this example:

You see a bottle of wine in Safeway. Its a brand you've enjoyed often before at $25. This same bottle is now on the shelf on discount for $4.99 and there is a whole end-cap full of the brand. What do you do? With a price now 1/5th of the old price, do you buy 5 times more wine? Nope. You question your memory and go buy something for $25. That's an example of a good reacting in the reverse to a discount. Its the "you get what you pay for" adage entering your purchase behavior. I'm pretty sure when The Rolling Stones sang "You can't always get what you want," the song was written about scarcity and Veblen goods, because - if you could always get what you wanted - like air for instance, then you wouldn't pay anything for it even if having it is a life or death issue. So that gets us back to the question of this post: Should you ever discount your wine?

Discounts versus Brand Strength

I've heard countless people in the wine business say you should never discount wine because you will pay hell getting your price back up later, and yet I've found little to support that thesis in actual practice for wines in distribution. Wines are discounted at the distributor level all the time and price goes up and down in a range. I would argue those wines are mostly "normal goods" though. But if you really have a luxury good, discounting will have detrimental impact on your brand.

The way I see things, taking a discount depends on the strength of your brand along the curve. As your normal good approaches a luxury good, discounting becomes less effective.