Public Monopoly and Economic Efficiency: Evidence from the Pennsylvania Liquor Control Board's Entry Decisions

42 Pages Posted: 16 Aug 2010 Last revised: 19 Aug 2010

See all articles by Katja Seim

Katja Seim

Yale School of Management

Joel Waldfogel

University of Minnesota - Twin Cities - Carlson School of Management; National Bureau of Economic Research (NBER); University of Minnesota - Twin Cities - Department of Economics

Date Written: August 2010

Abstract

While private monopolists are generally assumed to maximize profits, the goals of public enterprises are less well known. Using the example of Pennsylvania's state liquor retailing monopoly, we use information on store location choices, prices, wholesale costs, and sales to uncover the goals implicit in its entry decisions. Does it seek to maximize profits or welfare? We estimate a spatial model of demand for liquor that allows us to calculate counterfactual configurations of stores that maximize profit and welfare. We find that welfare maximizing networks have roughly twice as many stores as would maximize profit. Moreover, the actual network is much more similar in size and configuration to the welfare maximizing configuration. An alternative to a state monopoly would be the common practice of regulated private entry. While such regimes can give rise to inefficient location decisions, little is known about the size of the resulting inefficiencies. Even for a given number of stores, a simple characterization of free entry with our model results in a store configuration that produces welfare losses of between 3 and 9% of revenue. This is a third to half of the overall loss from unregulated free entry.

Suggested Citation

Seim, Katja and Waldfogel, Joel, Public Monopoly and Economic Efficiency: Evidence from the Pennsylvania Liquor Control Board's Entry Decisions (August 2010). NBER Working Paper No. w16258, Available at SSRN: https://ssrn.com/abstract=1658286

Katja Seim (Contact Author)

Yale School of Management ( email )

135 Prospect Street
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Joel Waldfogel

University of Minnesota - Twin Cities - Carlson School of Management ( email )

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Minneapolis, MN 55455
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States

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