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  • Abstract: The Pennsylvania Liquor Control Board administers the purchase and sale of wine and spirits and is mandated to charge a uniform 30% markup on all products. We use an estimated discrete choice model of demand for spirits, together with information on wholesale prices, to assess the implications of this policy. We find that failure to account for the correlation between demographics and consumption patterns leads to lower prices than those charged by a profit-maximizing, multi-product monopolist. Using product-specific markups leads to higher prices on average, less quantity consumed, an 11% increase in total profits, and greater welfare. The current one-size-fits-all pricing rule ignores variations in demand elasticities resulting in the implicit taxation of high-income and educated households by raising the prices of spirits they prefer (vodka and whiskey) while lowering the price of products favored by low-income and minority households (gin and rum).

  • 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: February 2014.

  • Funding: None.

  • Seminars: Arizona State, Bank of Canada, CESifo, CIDE, Federal Reserve Bank of Chicago, UConn, U.S. Department of Justice, East Anglia, Harvard/MIT, UJI, Johns Hopkins, Northwestern, Princeton, 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.

  • Presentations: PDF.

  • Media Citations: None yet.

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