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  • Abstract: We investigate the tension between firms and government policy in the heavily regulated alcoholic beverage industry, an industry that generates significant tax revenue but also poses health concerns. Using detailed data from the Pennsylvania Liquor Control Board, a public monopoly that purchases alcoholic beverages from upstream distillers for sale in state-run stores, we estimate a discrete choice demand model allowing for flexible substitution patterns among consumers while not imposing conduct among the many upstream distillers. We use the estimated demand model to investigate the ability of the regulator to realize policy goals. We find that changes in policy to either reduce alcohol consumption or increase tax revenue can be reversed by upstream firms with minimal level of coordination in prices. Further, the regulator's observed inability or unwillingness to modify policy in response to increases in demand, an occurrence we call "legislative inertia," increases profits for these firms and tax revenue for the state. Had the regulator attempted to reduce consumption in response to the increase in demand, the burden of its policy would have disproportionately fallen on low income, low education, and minority consumers, likely making such a policy revision politically infeasible.

  • Co-authors: Katja Seim (Wharton) and Jeff Thurk (Notre Dame).

  • Publication: Previously circulated as CEPR DP No. 9641.

  • JEL: L10, L21, L32.

  • First version: November 2010.

  • Current version: May 2016.

  • Funding: None.

  • Seminars: Arizona State, Bank of Canada, CESifo, CIDE, Edinburgh, Federal Reserve Bank of Chicago, UConn, U.S. Department of Justice, East Anglia, Harvard/MIT, UJI, Johns Hopkins, Northwestern, Princeton, Singapore Management University, UCLA, UT Austin, Vanderbilt, Yale.

  • Conferences: 2010 Workshop on Competition with Nonlinear Pricing and Loyalty Discounts, Bologna; 2011 UBC Summer Conference on Industrial Organization, Vancouver; 2011 Southern Economic Association Meeting, Washington, DC; 2012 Conference of the American Association of Wine Economists, Princeton; 2012 Petralia Sottana Applied Economics Workshop, Sicily; 2012 LACEA/LAMES, Lima; 2013 Yale Marketing-Industrial Organization Conference; 2013 MOITA Workshop, Riberao Preto; Econometric Society World Congress, Montreal, August 2015; XXX Jornadas de Econom Industrial, Alicante, September 2015.

  • Presentations: PDF.

  • Media Citations: None yet.

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