One Markup to Rule Them All: Taxation by Liquor Pricing Regulation
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 16.7% of consumers are better off under the policy. These consumers tend to be older, less wealthy or educated, and minorities. Simple policies therefore generate significant cross-subsidies and may be an effective tool for government to garner favor of key constituencies.
We thank Thomas Krantz at the Pennsylvania Liquor Control Board as well as Jerome Janicki and Mike Ehtesham at the National Alcohol Beverage Control Association for providing us with access to the data. We are grateful for many comments and suggestions, and in particular to Jeff Campbell, Kenneth Hendricks, Louis Kaplow, Julie Mortimer, Aviv Nevo, Joel Waldfogel, and participants at the 2017 Cowles Conference in Structural Microeconometrics and the 2017 NBER Summer Institute Industrial Organization workshop. This research was supported in part by the Notre Dame Center for Research Computing. We are solely responsible for any remaining errors. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Eugenio J. Miravete & Katja Seim & Jeff Thurk, 2020. "One Markup to Rule Them All: Taxation by Liquor Pricing Regulation," American Economic Journal: Microeconomics, vol 12(1), pages 1-41. citation courtesy of