Have you ever tried to buy a mobile phone on contract? Or choose an energy supplier? The pricing structure is deliberately complicated, making direct comparisons incredibly difficult. And the various suppliers NEVER compete on price.
This is, from their perspective, a sensible choice.
As soon as one player comes in with simple, understandable pricing, and begins to compete by offering lower prices than the others, then all profitability will be sucked out of the market. They all realise this.
And while I wouldn’t go so far as to claim that there’s a cartel arrangement, all the major mobile phone companies seem to offer deals that are pretty similar. (The only people who compete on price seem to be minor resellers of SIM-only deals.)
Across lots of industries where barriers to entry are high, there seems to be a sort of gentleman’s agreement not to compete on price. Airlines are interesting in this regard, because low cost carriers have broken through what was a rather complacent industry. When they started out, though, the response of the mainstream carriers was to drop their prices to unsustainably low levels on certain routes where they were facing competition, in order to try to squeeze the competitors out, so they could then raise their prices again free of these pesky competitors. The other strategy – one that seems to be taken by ISPs – is to buy out smaller companies who are offering competition, both for customer acquisition purposes but also to avoid the wrong sort of competition.
What about wine? I don’t think cheap wine will ever be profitable. There are lots of producers in the game, many of whom have written off their large capital cost of vineyard ownership years ago. And there are more producers than are needed to fulfil the needs of the modern retail market, so the main route to market – the supermarkets – have all the power in their hands. The producers need them, but from the retailer’s perspective any producer will do, so there’s little reciprocity in the arrangement. And cheap wine is caught up in an attritional price war. There’s always someone with wine they are desperate to shift, and so they will sell at a very low price.
The quality of cheap wine is now better than it has ever been. For the target market, therefore, there is infinite substitution. If one wine becomes too expensive, then there’ll be another ready to take its place. Cheap wines are all packaged the same way, and they all taste pretty similar. There are very few strong brands in wine, so producers of cheap wine have no competitive advantage that they can leverage. It’s just a straight price fight, and I can’t see this changing any time soon. This means it’s never going to be profitable playing at the bottom end of the market in the off-trade.