Working Paper: CEPR ID: DP9641
Authors: Eugenio J. Miravete; Katja Seim; Jeff Thurk
Abstract: The Pennsylvania Liquor Control Board administers the purchase and sale of wine and spirits 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 information on wholesale prices, to assess the welfare and redistribution implications of the chosen uniform markup rule. We find that it reduces welfare significantly, but mimics the optimal behavior of a multi-product monopolist. Relative to product-specific prices, the uniform prices do not exploit the observed heterogeneity of consumption across products and demographic groups reflected in relative spirit demand elasticities. They implicitly tax high-income and educated households by overpricing their favored spirit varieties. Our estimated returns to very sophisticated pricing strategies are small indicating the use of more complex pricing mechanisms as being neither socially desirable nor privately profitable.
Keywords: complex pricing; multiproduct price discrimination; taxation by regulation
JEL Codes: L12; L21; L32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| uniform pricing policy (L11) | welfare (I38) |
| uniform pricing policy (L11) | high-income households (R20) |
| uniform pricing policy (L11) | low-income households (R20) |
| uniform pricing policy (L11) | profit-maximizing behavior (D21) |
| sophisticated pricing strategy (D49) | profit increases (D33) |
| sophisticated pricing strategy (D49) | welfare (I38) |
| uniform markup policy (M38) | taxation mechanism (H20) |