A review of Kappo Masa, a popular restaurant in New York City, notes, “The markup that New York restaurants customarily add to retail wine and sake prices is about 150 percent. The average markup at Kappo Masa is 200 percent to 300 percent.” Even 150 percent is a much larger markup than the markups restaurants use to price the meals they serve. Why do restaurants use a higher markup for wine than for food, and why might a popular restaurant mark up the price of wine more than an average restaurant does? Source: Pele Wells, “Restaurant Review: Kappo Masa on the Upper East Side,” New York Times, January 6, 2015. The difference in the markups is likely due to A. the need to cover state and federal taxes on wine and alcohol products. B. differences in the prices of the two products. C. differences in the price elasticity of demand between the two products. D. the restaurants’ attempt to discourage alcohol consumption A popular restaurant might mark up the price of wine more than an average restaurant does because A. they buy more expensive wine. B. the diners are used to more selections. C. they buy more wine. D. the popularity of a restaurant draws diners who are willing to pay more.
The Correct Answer and Explanation is:
Correct Answers:
- First question: C. differences in the price elasticity of demand between the two products
- Second question: D. the popularity of a restaurant draws diners who are willing to pay more
Explanation
Restaurants often apply different markup strategies to food and beverages, particularly wine and alcohol. One key economic concept that explains this difference is price elasticity of demand—a measure of how sensitive consumers are to changes in price. When a product has inelastic demand, consumers are less likely to reduce their purchases in response to price increases. In contrast, products with elastic demand see significant drops in quantity demanded when prices rise.
In the case of restaurants, food tends to be more elastic because diners have many options both inside and outside the restaurant to choose from, including cheaper menu items or even alternative establishments. In contrast, wine and alcoholic beverages often have more inelastic demand, especially in upscale dining environments. Patrons who are already spending a premium for a fine dining experience are often less price-sensitive about wine. They may view it as a complement to the meal, a luxury indulgence, or even a status symbol. This allows restaurants to apply higher markups on wine—often reaching 150% to 300%—without significantly decreasing sales.
Additionally, popular or high-end restaurants like Kappo Masa can afford to mark up wine prices even more steeply. Their clientele typically includes affluent diners who are less sensitive to price and more motivated by exclusivity, ambiance, and brand reputation. These customers are willing to pay more, not just for the product itself but for the prestige of dining at a trendy or renowned location. Therefore, these restaurants capitalize on their market power and brand appeal to command premium prices for wine, a strategy that enhances profitability without necessarily reducing demand. This pricing tactic is rooted in economic theory but also influenced by consumer psychology and market positioning.
