NATIONAL BUREAU OF ECONOMIC RESEARCH
University of Notre Dame
Department of Economics
Notre Dame, IN 46556.
NBER Working Papers and Publications
|December 2017||One Markup to Rule Them All: Taxation by Liquor Pricing Regulation|
with Eugenio J. Miravete, Katja Seim: w24124
Government often chooses simple rules to regulate industry even when firms and consumers are heterogeneous. We evaluate the implications of this practice in the context of alcohol pricing where the regulator uses a single markup rule that does not vary across products. We estimate an equilibrium model of wholesale pricing and retail demand for horizontally differentiated spirits that allows for heterogeneity in consumer preferences based on observable demographics. We show that the single markup increases market power among upstream firms, particularly small firms whose portfolios are better positioned to take advantage of the policy. For consumers, the single markup acts as a progressive tax by overpricing products favored by the rich. It also decreases aggregate consumer welfare though 1...