Abstract:
The Pennsylvania Liquor Control Board is a public monopoly which purchases alcoholic beverages from upstream manufacturers for sale in state-run stores. We estimate a discrete choice demand model in this vertical market to show that upstream firms have significant market power despite a large and diverse product set. We find that a change in policy by the regulator to either reduce alcohol consumption or increase revenue can be reversed by these firms with minimal level of coordination in prices. Further, the regulator's inability or unwillingness to modify policy in response to changes in demand increases profits for the firms while decreasing retail prices for consumers. This suggests that taxation and price controls can encourage firms to employ tools such as advertising or product innovation which are outside of the regulator's purview.