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One Markup to Rule Them All: Taxation by Liquor Pricing Regulation

Eugenio Miravete (), Katja Seim and Jeff Thurk ()

No 24124, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D42 D63 H23 L43 L66 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ind, nep-mkt and nep-reg
Date: 2017-12
Note: IO PE
References: View references in EconPapers View complete reference list from CitEc
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