Working Paper: NBER ID: w24124
Authors: Eugenio J. Miravete; Katja Seim; Jeff Thurk
Abstract: Government often chooses simple rules to regulate industry even when firms and consumers are heterogeneous. We evaluate the implications of this practice in the context of alcohol pricing where the regulator uses a single markup rule that does not vary across products. We estimate an equilibrium model of wholesale pricing and retail demand for horizontally differentiated spirits that allows for heterogeneity in consumer preferences based on observable demographics. We show that the single markup increases market power among upstream firms, particularly small firms whose portfolios are better positioned to take advantage of the policy. For consumers, the single markup acts as a progressive tax by overpricing products favored by the rich. It also decreases aggregate consumer welfare though 16.7% of consumers are better off under the policy. These consumers tend to be older, less wealthy or educated, and minorities. Simple policies therefore generate significant cross-subsidies and may be an effective tool for government to garner favor of key constituencies.
Keywords: liquor pricing; regulation; markup policy; consumer welfare
JEL Codes: D42; D63; H23; L43; L66
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| single markup policy (M38) | market power among upstream firms (L11) |
| single markup policy (M38) | benefits small firms (L25) |
| single markup policy (M38) | aggregate consumer welfare (D69) |
| single markup policy (M38) | cross-subsidies favoring certain demographics and firms (H23) |
| single markup policy (M38) | redistribution of rents within upstream and downstream segments (D33) |
| product-specific markups (D49) | tax revenue (H27) |
| product-specific markups (D49) | consumer welfare (D69) |