Working Paper: NBER ID: w30896
Authors: Christopher Conlon; Nirupama L. Rao
Abstract: Products with negative externalities are often subject to regulations that limit competition. The single-product case may suggest that it is irrelevant for aggregate welfare whether output is restricted via corrective taxes or limiting competition. However, when products are differentiated curbing consumption through market power can be costly. Firms with market power may not only reduce total quantity, but distort the purchase decisions of inframarginal consumers. We examine a common regulation known as post-and-hold (PH) used by a dozen states for the sale of alcoholic beverages. Theoretically, PH eliminates competitive incentives among wholesalers selling identical products. We assemble unique data on distilled spirits from Connecticut, including matched manufacturer and wholesaler prices, to evaluate the welfare consequences of PH. For similar levels of ethanol consumption, PH leads to substantially lower consumer welfare (and government revenue) compared to excise, sales or Ramsey taxes by distorting consumption choices away from high-quality/premium brands and towards low-quality brands. Replacing PH with volumetric or ethanol-based taxes could reduce consumption by over 9% without reducing consumer surplus, and increase tax revenues by over 300%.
Keywords: No keywords provided
JEL Codes: D6; H21; H23; L13; L5; L66
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| PH regulations (G38) | higher prices for consumers (D49) |
| higher prices for consumers (D49) | lower overall welfare (D69) |
| PH regulations (G38) | distortion of consumption choices (D11) |
| distortion of consumption choices (D11) | lower overall welfare (D69) |
| PH regulations (G38) | reduced competition among wholesalers (L81) |
| reduced competition among wholesalers (L81) | higher prices for higher-quality products (L15) |
| PH regulations (G38) | skewed consumption towards lower-quality products (F61) |
| replacing PH with volumetric taxes (H29) | reduce overall ethanol consumption (Q42) |
| replacing PH with volumetric taxes (H29) | increase tax revenues (H29) |
| volumetric taxes (H29) | align prices with marginal costs (D40) |
| volumetric taxes (H29) | improve consumer welfare (D18) |