Certainly, demand affects price, but it also works the other way around. Consider this revealing, perhaps apocryphal, story about Ernest Gallo, the founder of the giant American wine company.

During his early years selling wine, he visited a New York buyer. He offered the buyer two samples of the same red wine. The buyer tasted the first one and asked about the price. Gallo told him it was five cents a bottle. The buyer tried the second wine and asked the price. This time Gallo said the wine cost 10 cents a bottle. The buyer chose the 10-cent bottle.

Sometimes, the more expensive the wine is, the more desirable it becomes. The reverse, however, can also be true.

A Price-Influences-Demand Case History

In the late 1990s the United States experienced a domestic grape shortage. In order to maximize their revenue, American producers concentrated on making wines that sold for over $14 a bottle. That left a giant opportunity in the low-priced wine market. An Australian company was poised to take advantage of that opportunity.

Back in 1957 Filippo and Maria Casella arrived in Australia from Sicily. After several years of cutting sugarcane and picking grapes, Filippo bought a 40-acre farm. In 1969 he started producing wine. For the next quarter of a century, the Casellas made wine and lived in the small, one story house nestled in their vineyards.

In 1994 Filippo turned the business over to his son John, who expanded the capacity of the winery. By the late 1990s the Casella winery was producing a low priced, well respected wine that, in its first year and a half, sold 19,000 cases.

In January 2001 John took samples of his wine to a New York importer. The importer liked the easy drinking, fruity taste and the $7 retail price, although he had reservations about the kangaroo on the label. Well, they immediately introduced the wine into the American market, and in the first seven months, the Yellow Tail brand sold 200,000 cases. The American wine-drinking public jumped on the bandwagon. Three years after its introduction, sales of Yellow Tail reached 7 million cases.

“Hot” Wines Priced to Sell

The early years of the twenty-first century brought with them an oversupply of grapes to the wine business. Overplanting of vineyards in Northern and Central California led to a glut, and prices took a nosedive. It meant that producers could get inexpensive grapes and upgrade the quality of their wines at the same time. Similar to Yellow Tail's strategy, the domestic producers identified a price they would sell their wines for and tailored their production and marketing plans to make the price possible.

A number of these “market driven” wines were introduced that combined above average quality and prices in the $10 range.

• Rex-Goliath Cabernet, Merlot, Pinot Noir, and Chardonnay: $8

• Castle Rock Winery Cabernet, Merlot, Pinot Noir, Syrah, Zinfandel, Chardonnay, and Sauvignon Blanc: $7 to $12

• Three Thieves Zinfandel, Cabernet, Bianco in one-liter jugs: $7 to $10

• McManis Family Vineyards Cabernet, Merlot, Syrah, Chardonnay, and Pinot Grigio: $9 to $10