The Price of Liquor is Too Damn High: Alcohol Taxation and Market Structure Christopher T. Conlon and Nirupama L. Rao∗ October 2, 2019 Abstract We study the relative benefits of taxation versus market structure regulations for distilled spirits. One popular regulation, called post and hold, helps wholesalers set collusive prices as the competitive equilibrium of a single period game. Assembling new datasets of wholesale and retail prices, and sales, we show PH leads to average wholesale markups of 30-40%, with higher markups on expensive products. Taxes distort relative prices less than PH. We show Connecticut could increase tax revenue by 350% and improve consumer welfare while holding alcohol consumption fixed. However, we also show our counterfactual policy may be slightly regressive compared to PH. JEL Classification Numbers: H21, H23, H25, L12, L13, L42, L51, L66, L81, K21. Keywords: Excise Tax, Pigouvian Tax, Tax Efficiency, Regulation, Vertical Restraints, Quantity Discounts ∗Conlon: New York University, Stern School of Business. 44 West 4th St Kaufman Management Center 7-76 New York, NY 10012.
[email protected]. Rao: University of Michigan, Ross School of Business. 701 Tappan Avenue Ann Arbor, MI 48109.
[email protected]. The authors thank seminar participants at Stanford, Columbia, Yale, Ohio State, Harvard, Kellogg, Wharton, NYU Law, NYU Stern, Drexel, Boston College, Dartmouth, INSEAD, UBC, Wisconsin, Cornell; and conference participants at Utah WBEC, FTC Microeconomics, and IIOC. We have benefited from many useful discussions from: Michael Riordan, Kate Ho, John Asker, Katja Seim, JF Houde, Alan Auerbach, Daniel Shaviro, Robin Lee, Chris Nosko, Rob Porter, Adam Cole, 1 The manufacture, distribution, and selling of alcoholic beverages are big business in the United States, with sales exceeding $100 billion in 2012.