Complexity, Efficiency, and Fairness in Multiproduct Liquor Pricing

Abstract

The Pennsylvania Liquor Control Board (PLCB) controls the purchase and sale of alcoholic beverages across the state and is legally mandated to charge a uniform 30% mark-up on all products. This paper investigates the welfare implications of this uniform markup. We show that consumption patterns vary across the state and these variations are correlated with consumer demographics. Using detailed data on prices, quantities, and demographics across 499 local markets, we estimate a multiproduct discrete choice model of demand. We use the demand estimates and data on wholesale prices to assess the consumer welfare implications of the current uniform mark-up. We find that the current system transfers rents from high income and educated households to minorities by underpricing those liquor varieties that this latter group favors. We further show the returns (to welfare and profits) of more sophisticated pricing strategies are small.