Working Paper: NBER ID: w16258
Authors: Katja Seim; Joel Waldfogel
Abstract: While private monopolists are generally assumed to maximize profits, the goals of public enterprises are less well known. Using the example of Pennsylvania's state liquor retailing monopoly, we use information on store location choices, prices, wholesale costs, and sales to uncover the goals implicit in its entry decisions. Does it seek to maximize profits or welfare? We estimate a spatial model of demand for liquor that allows us to calculate counterfactual configurations of stores that maximize profit and welfare. We find that welfare maximizing networks have roughly twice as many stores as would maximize profit. Moreover, the actual network is much more similar in size and configuration to the welfare maximizing configuration. An alternative to a state monopoly would be the common practice of regulated private entry. While such regimes can give rise to inefficient location decisions, little is known about the size of the resulting inefficiencies. Even for a given number of stores, a simple characterization of free entry with our model results in a store configuration that produces welfare losses of between 3 and 9% of revenue. This is a third to half of the overall loss from unregulated free entry.
Keywords: public monopoly; economic efficiency; liquor control; entry decisions
JEL Codes: L13; L21; L31; L81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| actual network of liquor stores operated by the PLCB (L66) | welfare-maximizing configuration (D69) |
| welfare-maximizing networks (D69) | number of stores (L81) |
| unregulated free entry (L59) | welfare losses (D69) |
| PLCB's decisions (L66) | welfare maximization (D69) |
| configuration of stores (L81) | welfare losses (D69) |