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

57 Pages Posted: 19 Dec 2017

See all articles by Eugenio J. Miravete

Eugenio J. Miravete

University of Texas at Austin; Centre for Economic Policy Research (CEPR)

Katja Seim

Yale School of Management

Jeff Thurk

University of Notre Dame

Date Written: December 2017

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.

Suggested Citation

Miravete, Eugenio J. and Seim, Katja and Thurk, Jeff, One Markup to Rule Them All: Taxation by Liquor Pricing Regulation (December 2017). NBER Working Paper No. w24124, Available at SSRN: https://ssrn.com/abstract=3089520

Eugenio J. Miravete (Contact Author)

University of Texas at Austin ( email )

Department of Economics
1 University Station C3100
Austin, TX 78712-0301
United States
512-232-1718 (Phone)
512-471-3510 (Fax)

HOME PAGE: http://www.eco.utexas.edu/facstaff/Miravete

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Katja Seim

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Jeff Thurk

University of Notre Dame ( email )

3047 Jenkins-Nanovic Hall
Notre Dame, IN New South Wales 46556
United States
5746313083 (Phone)

HOME PAGE: http://https://www3.nd.edu/~jthurk/

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