The Effect of Price Advertising and Prices: Evidence in the Wake of 44 Liquormart

45 Pages Posted: 1 Jul 2000 Last revised: 9 Oct 2010

See all articles by Jeff Milyo

Jeff Milyo

University of Missouri - Economics; Harvard University - Edmond J. Safra Center for Ethics; Institute for Corruption Studies

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: March 1998

Abstract

In May 1996 the U.S. Supreme Court struck down Rhode Island's ban on advertising prices of alcoholic beverages, making Rhode Island the subject of a natural experiment for measuring the impact of advertising on prices. Using Massachusetts prices as controls, we find that while advertising stores substantially cut prices of advertised products, prices of other products, at both advertising and non-advertising stores, rise under the advertising regime. We investigate stores' pricing responses to rivals' price advertising and find that small, non-advertising stores raise their prices of products advertised by rivals beyond their baseline price increase, while larger, advertising stores raise by less their prices of rival-advertised products. We find no reductions in price dispersion across stores with the introduction of price advertising. However, those stores that choose to advertise do have lower average prices both before and after the law change. Indirect information on quantities sold, based on Rhode Island Lottery ticket sales, indicate that newspaper-advertising stores draw a higher share of customers after they advertise than before.

Suggested Citation

Milyo, Jeffrey and Waldfogel, Joel, The Effect of Price Advertising and Prices: Evidence in the Wake of 44 Liquormart (March 1998). NBER Working Paper No. w6488. Available at SSRN: https://ssrn.com/abstract=226233

Jeffrey Milyo

University of Missouri - Economics ( email )

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Joel Waldfogel (Contact Author)

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

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National Bureau of Economic Research (NBER)

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University of Minnesota - Twin Cities - Department of Economics ( email )

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