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Market Rule Breakers Pay a Price

Organizations that don’t conform to the norms of their market category are penalized with higher prices, according to a new study from researchers at the Yale School of Management and London Business School.

The study, published in Administrative Science Quarterly, examined the Champagne market in France. The authors found that Champagne houses pay substantially different prices for the same homogenous raw material: grapes. They show that the price differences are not the result of economically rational reasons such as bargaining power, but of grape growers’ reactions to how Champagne houses adhere to the characteristics and behaviors that are expected of them. The more that a house violates expectations, the higher the price the growers charge in order to agree to transact with them. In contrast, houses that adhere to accepted norms are rewarded with better prices.

“Suppliers charge high prices to justify dealing with buyers they find less palatable,” says study co-author Amandine Ody-Brasier, assistant professor of organizational behavior at Yale SOM. “Contrary to the general view that markets are shaped solely by economic forces, our study suggests that markets can sometimes be purely socially constructed.”

The authors studied the exchanges between the 15,000 grape growers and 66 Champagne houses that make the sparkling wine, and conducted interviews and surveys to identify local norms and expected behaviors for Champagne houses and which houses violate them.

The authors found that the growers expect Champagne houses to be old, located in a traditional village, and independently managed, preferably by a descendant of the original founder. More concretely, Champagne houses are expected to stick to their role of making and selling Champagne and not venture into acquiring their own vineyards, supplying supermarket brands, or making sparkling wine abroad.

Champagne houses that violated any of these norms paid more for their grapes, according to the authors’ analysis. For example, houses with a family CEO paid 85 eurocents less for a kilogram of raw material than houses headed by a non-family CEO, and houses that supply a supermarket brand paid almost €2.24 more per kilogram than houses that don’t supply a supermarket.

“Champagne houses that violate what is expected of them are viewed as peripheral players who can harm the collective identity and long-term economic interests of the industry, and they are made to pay for it in the form of higher prices,” says Ody-Brasier.

The authors say their study’s findings have implications not only for Champagne, but for any mature market that has norms of behavior, from microbreweries to corporate law.

“The Price You Pay: Price-setting as a Response to Norm Violations in the Market for Champagne Grapes” by Amandine Ody-Brasier (Yale School of Management) and Freek Vermeulen (London Business School) is published in Administrative Science Quarterly.

Department: Research