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COMPLEXITY, EFFICIENCY, AND FAIRNESS IN MULTIPRODUCT LIQUOR PRICING
(Click above to download a pdf copy of the paper)
- Abstract: The Pennsylvania Liquor Control Board administers the purchase and sale of alcoholic beverages across the state and is legally mandated to charge a uniform 30% markup on all products. We use an estimated discrete choice model of demand for spirits, together with cost information in the form of wholesale prices, to assess the welfare implications and redistribution effects of the current uniform markup rule. We find that the current price regulation reduces welfare significantly, but mimics the optimal behavior of a multi-product monopolist. We find that current prices do not reflect relative spirits demand elasticities and the observed heterogeneity of consumption patterns across products and demographic groups. Implicitly, they tax high income and educated households by overpricing their favored spirits varieties. Our evidence does not support the use of complex pricing mechanisms as being either socially desirable or privately profitable; our estimated returns of sophisticated pricing strategies are small.
- Co-authors: Katja Seim (UPenn), Jeff Thurk (Notre Dame), and Joel Waldfogel (Minnesota).
- Mimeo.
- JEL: L10, L21, L32.
- First version: November 2010.
- Current version: April 2013.
- 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.
- Presentations: PDF.
- Media Citations: None yet.
- Noteworthy: .
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