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Why do sales of bottled water grow every year despite of the well-known fact that it is produced from the same tap water?
Bottled water industry did not exist 30 years ago and it was only in the 70’s that French companies Perrier and Evian started offering bottled water for sale. Today, every beverage company sells its version of bottled water for prices that range from 50 cents to 5 dollars per gallon. Since 70’s the sales bottled water have grown to a $16 billion per year (2007 estimate). So, what drives people to buy a product that is readily available in every home in the United States?
There have been a number of research studies on the issue and the data is readily available. In fact, ABC’s 20/20 investigated this issue and aired an episode on it in May 2005. ABC performed a number of chemical tests and concluded that there was no difference between the chemical compositions of tap water and bottled water. Moreover, most people failed to identify tap water on a blind test. Companies like Coca-Cola and Pepsi confirmed on a numerous occasions that their product is just a packaged and filtered tap water taken from sources around the country.
Let us first look at the market of bottled water at its conception 30 years ago. First entrants to market were positioning bottled water as an upscale product and were packaging it in fancy glass bottles and selling it through upscale restaurants and grocery chains. At that time, bottle water was considered a luxury good and people who purchased bottled water basis were mostly buying status and feeling of belonging to a higher society. That allowed companies to charge high prices for it. The demand and supply curves are shown in the figure below as ...