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A number of blockbuster mergers have received (often negative) attention from media and competition authorities in recent months. From the recently challenged Staples-Office Depot merger to the abandoned Comcast-Time Warner merger to the heavily scrutinized Aetna-Humana merger (among many others), there has been a wave of potential mega-mergers throughout the economy—many of them met with regulatory resistance. We’ve discussed several of these mergers at TOTM (see, e.g., here, here, here and here).

Many reporters, analysts, and even competition authorities have adopted various degrees of the usual stance that big is bad, and bigger is even badder. But worse yet, once this presumption applies, agencies have been skeptical of claimed efficiencies, placing a heightened burden on the merging parties to prove them and often ignoring them altogether. And, of course (and perhaps even worse still), there is the perennial problem of (often questionable) market definition — which tanked the Sysco/US Foods merger and which undergirds the FTC’s challenge of the Staples/Office Depot merger.

All of these issues are at play in the proposed acquisition of British aluminum can manufacturer Rexam PLC by American can manufacturer Ball Corp., which has likewise drawn the attention of competition authorities around the world — including those in Brazil, the European Union, and the United States.

But the Ball/Rexam merger has met with some important regulatory successes. Just recently the members of CADE, Brazil’s competition authority, unanimously approved the merger with limited divestitures. The most recent reports also indicate that the EU will likely approve it, as well. It’s now largely down to the FTC, which should approve the merger and not kill it or over-burden it with required divestitures on the basis of questionable antitrust economics.

The proposed merger raises a number of interesting issues in the surprisingly complex beverage container market. But this merger merits regulatory approval.

The International Center for Law & Economics recently released a research paper entitled, The Ball-Rexam Merger: The Case for a Competitive Can Market. The white paper offers an in-depth assessment of the economics of the beverage packaging industry; the place of the Ball-Rexam merger within this remarkably complex, global market; and the likely competitive effects of the deal.

The upshot is that the proposed merger is unlikely to have anticompetitive effects, and any competitive concerns that do arise can be readily addressed by a few targeted divestitures.

The bottom line

The production and distribution of aluminum cans is a surprisingly dynamic industry, characterized by evolving technology, shifting demand, complex bargaining dynamics, and significant changes in the costs of production and distribution. Despite the superficial appearance that the proposed merger will increase concentration in aluminum can manufacturing, we conclude that a proper understanding of the marketplace dynamics suggests that the merger is unlikely to have actual anticompetitive effects.

All told, and as we summarize in our Executive Summary, we found at least seven specific reasons for this conclusion:

  1. Because the appropriately defined product market includes not only stand-alone can manufacturers, but also vertically integrated beverage companies, as well as plastic and glass packaging manufacturers, the actual increase in concentration from the merger will be substantially less than suggested by the change in the number of nationwide aluminum can manufacturers.
  2. Moreover, in nearly all of the relevant geographic markets (which are much smaller than the typically nationwide markets from which concentration numbers are derived), the merger will not affect market concentration at all.
  3. While beverage packaging isn’t a typical, rapidly evolving, high-technology market, technological change is occurring. Coupled with shifting consumer demand (often driven by powerful beverage company marketing efforts), and considerable (and increasing) buyer power, historical beverage packaging market shares may have little predictive value going forward.
  4. The key importance of transportation costs and the effects of current input prices suggest that expanding demand can be effectively met only by expanding the geographic scope of production and by economizing on aluminum supply costs. These, in turn, suggest that increasing overall market concentration is consistent with increased, rather than decreased, competitiveness.
  5. The markets in which Ball and Rexam operate are dominated by a few large customers, who are themselves direct competitors in the upstream marketplace. These companies have shown a remarkable willingness and ability to invest in competing packaging supply capacity and to exert their substantial buyer power to discipline prices.
  6. For this same reason, complaints leveled against the proposed merger by these beverage giants — which are as much competitors as they are customers of the merging companies — should be viewed with skepticism.
  7. Finally, the merger should generate significant managerial and overhead efficiencies, and the merged firm’s expanded geographic footprint should allow it to service larger geographic areas for its multinational customers, thus lowering transaction costs and increasing its value to these customers.

Distinguishing Ardagh: The interchangeability of aluminum and glass

An important potential sticking point for the FTC’s review of the merger is its recent decision to challenge the Ardagh-Saint Gobain merger. The cases are superficially similar, in that they both involve beverage packaging. But Ardagh should not stand as a model for the Commission’s treatment of Ball/Rexam. The FTC made a number of mistakes in Ardagh (including market definition and the treatment of efficiencies — the latter of which brought out a strenuous dissent from Commissioner Wright). But even on its own (questionable) terms, Ardagh shouldn’t mean trouble for Ball/Rexam.

As we noted in our December 1st letter to the FTC on the Ball/Rexam merger, and as we discuss in detail in the paper, the situation in the aluminum can market is quite different than the (alleged) market for “(1) the manufacture and sale of glass containers to Brewers; and (2) the manufacture and sale of glass containers to Distillers” at issue in Ardagh.

Importantly, the FTC found (almost certainly incorrectly, at least for the brewers) that other container types (e.g., plastic bottles and aluminum cans) were not part of the relevant product market in Ardagh. But in the markets in which aluminum cans are a primary form of packaging (most notably, soda and beer), our research indicates that glass, plastic, and aluminum are most definitely substitutes.

The Big Four beverage companies (Coca-Cola, PepsiCo, Anheuser-Busch InBev, and MillerCoors), which collectively make up 80% of the U.S. market for Ball and Rexam, are all vertically integrated to some degree, and provide much of their own supply of containers (a situation significantly different than the distillers in Ardagh). These companies exert powerful price discipline on the aluminum packaging market by, among other things, increasing (or threatening to increase) their own container manufacturing capacity, sponsoring new entry, and shifting production (and, via marketing, consumer demand) to competing packaging types.

For soda, Ardagh is obviously inapposite, as soda packaging wasn’t at issue there. But the FTC’s conclusion in Ardagh that aluminum cans (which in fact make up 56% of the beer packaging market) don’t compete with glass bottles for beer packaging is also suspect.

For aluminum can manufacturers Ball and Rexam, aluminum can’t be excluded from the market (obviously), and much of the beer in the U.S. that is packaged in aluminum is quite clearly also packaged in glass. The FTC claimed in Ardagh that glass and aluminum are consumed in distinct situations, so they don’t exert price pressure on each other. But that ignores the considerable ability of beer manufacturers to influence consumption choices, as well as the reality that consumer preferences for each type of container (whether driven by beer company marketing efforts or not) are merging, with cost considerations dominating other factors.

In fact, consumers consume beer in both packaging types largely interchangeably (with a few limited exceptions — e.g., poolside drinking demands aluminum or plastic), and beer manufacturers readily switch between the two types of packaging as the relative production costs shift.

Craft brewers, to take one important example, are rapidly switching to aluminum from glass, despite a supposed stigma surrounding canned beers. Some craft brewers (particularly the larger ones) do package at least some of their beers in both types of containers, or simultaneously package some of their beers in glass and some of their beers in cans, while for many craft brewers it’s one or the other. Yet there’s no indication that craft beer consumption has fallen off because consumers won’t drink beer from cans in some situations — and obviously the prospect of this outcome hasn’t stopped craft brewers from abandoning bottles entirely in favor of more economical cans, nor has it induced them, as a general rule, to offer both types of packaging.

A very short time ago it might have seemed that aluminum wasn’t in the same market as glass for craft beer packaging. But, as recent trends have borne out, that differentiation wasn’t primarily a function of consumer preference (either at the brewer or end-consumer level). Rather, it was a function of bottling/canning costs (until recently the machinery required for canning was prohibitively expensive), materials costs (at various times glass has been cheaper than aluminum, depending on volume), and transportation costs (which cut against glass, but the relative attractiveness of different packaging materials is importantly a function of variable transportation costs). To be sure, consumer preference isn’t irrelevant, but the ease with which brewers have shifted consumer preferences suggests that it isn’t a strong constraint.

Transportation costs are key

Transportation costs, in fact, are a key part of the story — and of the conclusion that the Ball/Rexam merger is unlikely to have anticompetitive effects. First of all, transporting empty cans (or bottles, for that matter) is tremendously inefficient — which means that the relevant geographic markets for assessing the competitive effects of the Ball/Rexam merger are essentially the largely non-overlapping 200 mile circles around the companies’ manufacturing facilities. Because there are very few markets in which the two companies both have plants, the merger doesn’t change the extent of competition in the vast majority of relevant geographic markets.

But transportation costs are also relevant to the interchangeability of packaging materials. Glass is more expensive to transport than aluminum, and this is true not just for empty bottles, but for full ones, of course. So, among other things, by switching to cans (even if it entails up-front cost), smaller breweries can expand their geographic reach, potentially expanding sales enough to more than cover switching costs. The merger would further lower the costs of cans (and thus of geographic expansion) by enabling beverage companies to transact with a single company across a wider geographic range.

The reality is that the most important factor in packaging choice is cost, and that the packaging alternatives are functionally interchangeable. As a result, and given that the direct consumers of beverage packaging are beverage companies rather than end-consumers, relatively small cost changes readily spur changes in packaging choices. While there are some switching costs that might impede these shifts, they are readily overcome. For large beverage companies that already use multiple types and sizes of packaging for the same product, the costs are trivial: They already have packaging designs, marketing materials, distribution facilities and the like in place. For smaller companies, a shift can be more difficult, but innovations in labeling, mobile canning/bottling facilities, outsourced distribution and the like significantly reduce these costs.  

“There’s a great future in plastics”

All of this is even more true for plastic — even in the beer market. In fact, in 2010, 10% of the beer consumed in Europe was sold in plastic bottles, as was 15% of all beer consumed in South Korea. We weren’t able to find reliable numbers for the U.S., but particularly for cheaper beers, U.S. brewers are increasingly moving to plastic. And plastic bottles are the norm at stadiums and arenas. Whatever the exact numbers, clearly plastic holds a small fraction of the beer container market compared to glass and aluminum. But that number is just as clearly growing, and as cost considerations impel them (and technology enables them), giant, powerful brewers like AB InBev and MillerCoors are certainly willing and able to push consumers toward plastic.

Meanwhile soda companies like Coca-cola and Pepsi have successfully moved their markets so that today a majority of packaged soda is sold in plastic containers. There’s no evidence that this shift came about as a result of end-consumer demand, nor that the shift to plastic was delayed by a lack of demand elasticity; rather, it was primarily a function of these companies’ ability to realize bigger profits on sales in plastic containers (not least because they own their own plastic packaging production facilities).

And while it’s not at issue in Ball/Rexam because spirits are rarely sold in aluminum packaging, the FTC’s conclusion in Ardagh that

[n]on-glass packaging materials, such as plastic containers, are not in this relevant product market because not enough spirits customers would switch to non-glass packaging materials to make a SSNIP in glass containers to spirits customers unprofitable for a hypothetical monopolist

is highly suspect — which suggests the Commission may have gotten it wrong in other ways, too. For example, as one report notes:

But the most noteworthy inroads against glass have been made in distilled liquor. In terms of total units, plastic containers, almost all of them polyethylene terephthalate (PET), have surpassed glass and now hold a 56% share, which is projected to rise to 69% by 2017.

True, most of this must be tiny-volume airplane bottles, but by no means all of it is, and it’s clear that the cost advantages of plastic are driving a shift in distilled liquor packaging, as well. Some high-end brands are even moving to plastic. Whatever resistance (and this true for beer, too) that may have existed in the past because of glass’s “image,” is breaking down: Don’t forget that even high-quality wines are now often sold with screw-tops or even in boxes — something that was once thought impossible.

The overall point is that the beverage packaging market faced by can makers like Ball and Rexam is remarkably complex, and, crucially, the presence of powerful, vertically integrated customers means that past or current demand by end-users is a poor indicator of what the market will look like in the future as input costs and other considerations faced by these companies shift. Right now, for example, over 50% of the world’s soda is packaged in plastic bottles, and this margin is set to increase: The global plastic packaging market (not limited to just beverages) is expected to grow at a CAGR of 5.2% between 2014 and 2020, while aluminum packaging is expected to grow at just 2.9%.

A note on efficiencies

As noted above, the proposed Ball/Rexam merger also holds out the promise of substantial efficiencies (estimated at $300 million by the merging parties, due mainly to decreased transportation costs). There is a risk, however, that the FTC may effectively disregard those efficiencies, as it did in Ardagh (and in St. Luke’s before it), by saddling them with a higher burden of proof than it requires of its own prima facie claims. If the goal of antitrust law is to promote consumer welfare, competition authorities can’t ignore efficiencies in merger analysis.

In his Ardagh dissent, Commissioner Wright noted that:

Even when the same burden of proof is applied to anticompetitive effects and efficiencies, of course, reasonable minds can and often do differ when identifying and quantifying cognizable efficiencies as appears to have occurred in this case.  My own analysis of cognizable efficiencies in this matter indicates they are significant.   In my view, a critical issue highlighted by this case is whether, when, and to what extent the Commission will credit efficiencies generally, as well as whether the burden faced by the parties in establishing that proffered efficiencies are cognizable under the Merger Guidelines is higher than the burden of proof facing the agencies in establishing anticompetitive effects. After reviewing the record evidence on both anticompetitive effects and efficiencies in this case, my own view is that it would be impossible to come to the conclusions about each set forth in the Complaint and by the Commission — and particularly the conclusion that cognizable efficiencies are nearly zero — without applying asymmetric burdens.

The Commission shouldn’t make the same mistake here. In fact, here, where can manufacturers are squeezed between powerful companies both upstream (e.g., Alcoa) and downstream (e.g., AB InBev), and where transportation costs limit the opportunities for expanding the customer base of any particular plant, the ability to capitalize on economies of scale and geographic scope is essential to independent manufacturers’ abilities to efficiently meet rising demand.

Read our complete assessment of the merger’s effect here.

Washington voters took a big step in yesterday’s election and approved an initiative, known as I-1183, to privatize state liquor sales.  Privatization of alcohol sales has been an issue I’ve tracked here at TOTM (see e.g., here).  Many states strictly regulate liquor sales through state ownership of liquor stores and required distribution through wholesalers.  These restrictions are frequently described as “wholesale monopoly laws” for that reason.  These distribution schemes have been in place since Prohibition ended in 1933, and wholesalers have effectively lobbied state legislatures to secure and maintain monopoly power over liquor distribution.  State laws were often promulgated with the stated purpose of reducing alcohol’s social harms; however, as James Cooper and I have found in recent research, the negative competitive effects of these laws mostly result in a wealth transfer from consumers to wholesalers with little or none in the way of  offsetting social benefits from reducing the harms associated with alcohol consumption.

Costco and other large retailers backed an initiative similar to I-1183 last year, but a coalition of citizens’ groups – funded by beer and wine wholesalers – were able to convince voters to defeat the initiative.  This year the players were the same, but the outcome was drastically different.  A Seattle Times article explains that this year’s:

“campaign was a battle of corporate interests, with Costco contributing the vast majority of the money for the pro-1183 campaign. . . . The coalition against I-1183 was financed mostly by wine and liquor distributors, who fear that liquor and wine deregulation in the measure will spread to other states.”

Costco contributed a record-breaking $22.5 million to the I-1183 campaign.  The article continues:

Tom Geiger, communication director for the union representing more than 700 workers in state-run liquor stores, said he thought the results raised questions about democracy itself.  “If a private company decides to spend tens of millions of dollars to pass a new law, to buy an election, can they do it?” Geiger asked. The results in this case, he said, suggest they can.

What an odd objection given the history of state alcohol regulation.  I guess the alternative would have been for Costco and other large retailers to influence a policy change by buying the legislature?  But wholesalers have a long history of superiority on that front.  It doesn’t seem too objectionable that, compared to rent-seeking legislation in favor of wholesalers at the expense of consumers, Costco and others took action in their own-self interest to influence citizens that these reforms would make them better off as well.

First, Google had the audacity to include a map in search queries suggesting a user wanted a map.  Consumers liked it.  Then came video.  Then, they came for the beer:

Google’s first attempt at brewing has resulted in a beer that taps ingredients from all across the globe. They teamed up with Delaware craft brewery Dogfish Head to make “URKontinent,” a Belgian Dubbel style beer with flavors from five different continents.

No word yet from the Google’s antitrust-wielding critics whether integration into beer will exclude rivals who vertical search engines who, without access to the beer, have no chance to compete.  Yes, there are specialized beer search sites if you must know (or local beer search).  Or small breweries who, because of Google’s market share in search, cannot compete against Dogfish Head’s newest product.  But before we start the new antitrust investigation, Google has offered some new facts to clarify matters:

Similarly, the project with Dogfish Head brewery was a Googler-driven project organized by a group of craftbrewery aficionados across the company. While our Googlers had fun advising on the creation of a beer recipe, we aren’t receiving any proceeds from the sale of the beer and we have no plans to enter the beer business.

Whew.  What a relief.  But, I’m sure the critics will be watching just in case to see if Dogfish Head jumps in the search rankings.  Donating time and energy to the creation of beer is really just a gateway to more serious exclusionary conduct, right?  And Section 5 of the FTC Act applies to incipient conduct in the beer market, clearly.  Or did the DOJ get beer-related Google activities in the clearance arrangement between the agencies?

0 for 2

Josh Wright —  7 March 2011

The Supreme Court denied cert in both S&M Brands v. Caldwell and Wine Country Gift Baskets v. Steen.  I had participated in drafting amicus briefs, along with my colleague Todd Zywicki, supporting certiorari in each.  The briefs are available here and here.  Maybe I’ll have better luck next year.

Tomorrow, I’ll be presenting my work with James Cooper (FTC), State Regulation of Alcohol Distribution: The Effects of Post & Hold Laws on Output and Social Harms, at the DOJ Antitrust Division in the Economic Analysis Group Seminar.  We’ve received great critical feedback and suggestions for the paper thus far in earlier presentations and suspect that the DOJ economists will be no exception.  I’m looking forward to it.

I’ve mentioned the CARE Act previously (here and here).  On Wednesday, the House Committee on Courts and Competition held a hearing on the revised CARE Act — which would effectively immunize a host of anticompetitive state alcohol regulations from challenge.  The policy tradeoffs here are that the higher prices and reduced consumption associated with competitive restrictions in these markets might be offset by a reduction in the social harms associated with alcohol consumption (e.g. drunk driving, traffic fatalities, medical problems, etc.).  My work with James Cooper is an attempt to empirically identify the magnitude of these competitive and social harm effects concerning post and hold laws, a particular species of state alcohol regulation which provides incentives for alcohol wholesalers to collude and reduces the incentive for sales.  We observe that:

Economic theory would suggest that PH laws reduce unilateral incentives for distributors to reduce prices and may facilitate tacit or explicit collusion, both to the detriment of consumers. Consistent with economic theory, we show that the PH laws reduce consumption by 2-8 percent. We also test whether PH laws provide offsetting benefits in the form of reducing a range of social harms associated with alcohol consumption. We find no evidence of such offsetting benefits. Taken together these results suggest that PH laws are socially harmful and result only in a wealth transfer from marginal alcohol consumers, who are unlikely to exert externalities on society, to wholesalers. These results also suggest a socially beneficial role for antitrust challenges to PH laws and similar anticompetitive state regulation. If states wish to reduce the social ills associated with drinking, our results suggest that increasing taxes and directly targeting social harms are superior policy instruments to PH laws.

Our findings offer a significant reason to be skeptical of legislation such as the CARE Act (both before and after its recent revision).   Our analysis was cited several times during the hearings, including in the submissions by the Wine Institute, comments from the American Bar Association Antitrust Section, and while his written testimony is not available yet, also in Professor Elhauge’s remarks.  You can see the webcast here.  Whether one believes or results are sufficient to push the debate in one direction or another, it is nice to see some of the policy debate focus on evidence.

The paper is available for download here.

The political economy of alcohol regulation has always been fascinating.  But things took an interesting turn of late (HT: Marginal Revolution) when a beer industry trade group took a stand against a proposition that would legalize marijuana in California:

The California Beer & Beverage Distributors is spending money in the state to oppose a marijuana legalization proposition on the ballot in November, according to records filed with the California Secretary of State. The beer sellers are the first competitors of marijuana to officially enter the debate; backers of the initiative are closely watching liquor and wine dealers and the pharmaceutical industry to see if they enter the debate in the remaining weeks.

The story points out that Sierra Nevada and Stone Brewing Company (amongst others one presumes) do not support the actions of the California Beverage & Beer Distributors.   The politics are fascinating, with, for example, the Teamsters and teachers supporting legalization.  The linked story also recently updated with the following (in my view, pretty weak) defensive statement from the CBBD:

First and foremost, we are not opposed to the legalization of marijuana. We have no position on that…That’s for the voters to decide. Second of all, we do not think of [marijuana] as a competitive product in the marketplace,” she said. “That’s not the issue. Our issue is it’s a poorly written initiative. When prohibition was repealed, there was already a regulatory system in place to deal with the distribution or sale of alcohol. Under this initiative, there is not going to be anything in place state run. It’s going to be 500-some different counties and cities” involved in regulating the sale and distribution of marijuana.

So its the CBBD’s general interest in poorly worded initiatives?  Its not the fact that beer and marijuana are likely economic substitutes at the relevant margin that has their attention?  Really?

Economist and occasional TOTM guest blogger Steve Salop (Georgetown) recently sent me the following questions spurred by the local debate over Governor McConnell’s proposal to private the retailing of alcoholic beverages:

I have my first antitrust class of the semester tomorrow.  Among the issues I teach the first week are (1) the fact that demand curves slope down; (2) restrictions on competition tend to reduce output and consumer welfare; (3) state regulation is often used to restrict output.  While procrastinating from class preparation today, I read a Washington Post article about the controversy in Virginia over whether to privatize liquor stores.  The article quotes an epidemiologist who sounds like a closet economist: “If you make it easier to drink, people will drink more. … It’s as simple and basic as that.  This seemed like a great example to use for my class.  (Of course, it’s a little more complicated.  The epidemiologist also said, “And if people drink more, we have more alcohol-related problems.”  And, then he gave his statement, “it’s as simple and basic as that.” )  Okay, there are externalities, even in Virginia.  But, here is where I got confused.  The article refers to a study by George Mason economist Don Boudreaux who apparently did a study (available here) that showed that state privatization did not lead to more alcohol-related problems, at least not more alcohol-related deaths.

So, I have two questions: What should I tell my students about the basics of demand theory?, and the overarching benefits of antitrust over regulation?  Or, is this just one of those “politics trumps economics” arguments: the demand for limited government outweighs the law of downward-sloping demand.

Here a few thoughts.

First, its good to know that Steve and I teach the same things on the first day of antitrust class.  Things are apparently not too different, at least when it comes to antitrust class, on the other side of the Potomac.

Second, to frame the issues for readers, state-imposed restrictions on competition take many forms and are a common problem faced by antitrust authorities, they often involve “boards” appointed by the state granted authority to regulate particular industries, including the imposition of barriers to entry (recall Eric Helland’s post on the monks fighting against restrictions imposed by the Louisiana funeral industry board — indeed, I remember fondly my time at the Federal Trade Commission with the “Dirty Boards” team whose task was to identify these boards).  The economic welfare analysis for many of these restrictions in straightforward.  The restriction on competition reduces output, raises price, and reduces consumer welfare.  What makes the state restrictions on alcoholic beverages more interesting from an economic perspective is that there is at least a plausible claim to be made that reducing output will also reduce the external social costs associated with alcohol consumption, producing benefits that could potentially offset the negative consumer welfare effects.  The relative magnitudes of these effects is an empirical question.

Third, as Steve’s question observes, the obvious effect of privatization, lifting the competitive restriction, will be to increase output and reduce prices.  The law of demand is pretty easy to follow here.  But doesn’t the law of demand also imply that greater competition and reduced prices implies greater social costs in the form of more “problem drinking?”

On the margin, yes!  Why?  The state restrictions on retail competition as well as those at the wholesaler level, raise price to both marginal consumers with higher demand elasticities at current prices (a 1% increase in price will result in a decrease in consumption greater than 1%)  and infra-marginal drinkers with more inelastic demand at current prices (a 1% increase in price will result in a decrease in consumption less than 1%).  As Steve notes, the law of demand implies that unless the drinkers who create those social harms have perfectly inelastic demand, that is, there consumption is entirely invariant to changes in prices, there will be “some” effect on consumption from “problem drinkers,” and thus some positive effect in reducing external costs (see my earlier post on the CARE Act’s odd approach to burdens of proof regarding this issue).

But note that the source of externalities in this example come from a concentrated group.  As Cook and Moore (2002, p.122) note, “those in the top decile of the drinking distribution consume more than half of all ethanol. Since alcohol problems are also highly concentrated in this group, it seems reasonable to target alcohol-control policies at them.”  The impact of regulatory changes on alcohol consumption and behavior in this concentrated group should the margin focused upon for analysis of the magnitude of any “temperance” effect.

Fourth, as a sidenote, several studies have shown a negative relationship between alcohol prices (often measured by excise taxes) and socially harmful behavior. For example, Saffer & Grossman (1987) and Kenkel (1993) report negative relationships between alcohol prices and drunk-driving. Coate & Grossman (1988) find a negative relationship between price and self-reported underage drinking, but this result disappears when religion and other covariates are introduced. More recently, Markowitz & Grossman (1998) find a negative relationship between state beer excise taxes and domestic violence.  As Cooper and Wright point out in our paper, one potential reason for this seeming inconsistency between Boudreaux’s results (and the other results referred to in the article finding that deregulation increases consumption without increasing social harms, as well as our own results, discussed below) may be that earlier work on the relationship between alcohol prices and the harms we measure was based on samples from the 1970s and early 1980s and thus unable to include the effect of ZT and BAC08 laws. Consistent with more recent research [e.g., Carpenter (2004); Dee (2001)], it appears that ZT and BAC08 laws are important sources of reductions in drunk-driving and teen drinking. Specifically, our results suggest that ZT and BAC08 laws reduce alcohol-related accidents by 7-8% and 4-5%, respectively.

But there is no reason to believe that this reduction will be large, much less large enough to offset the welfare losses imposed on consumers in the form of higher prices and reduced output.  That is an empirical question.

Fifth, the studies finding that reductions in output associated with state-imposed restrictions on competition are not necessarily correlated with significant reductions in the social ills associated with problem drinking (alcohol-related deaths, DUIs, etc.) are consistent with what Cooper and Wright find in our recently study of state post and hold laws.  The post and hold laws operate at the wholesale level, but are also restrictions on competition, making price competition between wholesalers more expensive by prohibiting short-term price reductions, and of course, facilitating collusion by requiring that wholesalers share future price information with rivals in advance.  To review, we find that post and hold laws result in significant reductions in output — representing consumer welfare losses — without any statistically or practically relevant reduction in measures of alcohol-related social costs.  The lack of measurable effect may be because the reduction in consumption is relatively small, leading to only small behavioral changes for those in the top of the alcohol consumption distribution.

So — I’ve written a lot and am not sure I’ve answered Steve’s original question.  What should he tell his antitrust class about demand theory, antitrust vs. regulation, and political economy of privatization in light of the Virginia ABC example?  Here’s a few answers:

1. The Virginia ABC example does nothing to change the bottom line: (1) the law of demand lives on, (2) restrictions on competition reduce output and raise price and reduce consumer welfare, and (3) states frequently restrict competition with the predicted consequences — I might add the Demsetzian point that these state imposed restrictions are the toughest to get rid of, even for antitrust.

2. Calculating the impact of a regulatory change on consumer welfare can be tough.  Here, I think highlighting the tradeoff between welfare reductions of the conventional antitrust sort and reducing negative externalities would be a very useful exercise for the class.   On the theoretical end, I think it requires the distinction between marginal and infra-marginal consumers that is tool antitrust lawyers should have in their toolkit (price discrimination, market definition, vertical restraints, etc.).  While predicting the output effects are straightforward, the welfare analysis is a bit more complicated in economic terms.

3. For antitrust lawyers, it is worth thinking about how to convince a generalist judge about the relevant economics in this setting.   Having students understand the complexities and learn to simultaneously teach, translate and persuade the court of the relevant economic and empirical analysis is something we should be encouraging the students to think about on day one.

4. I can’t think of any great examples for the demand for limited government trumping the law of demand, but the persistence of the state alcohol monopolies despite their negative economic consequences on consumers gives a wonderful opportunity to talk about cartel formation and stability, as well as the political economy of these laws more generally.  For politics trumping economics more generally, see “Rent Control” or the proposed antitrust exemption for newspapers.

In an earlier post on the CARE Act, I highlighted the fact that the law would essentially immunize state laws regulating the distribution and sale of beer, wine and liquor wholesalers from challenge under the Commerce clause and the Sherman Act.  For more details on the CARE Act, see the earlier post, but the bottom line is that the CARE Act will put an end to successful challenges to anticompetitive state regulation protecting alcohol wholesalers such as the Costco v. Maleng or Granholm v. Heald.  In this post, I want to focus on a recent empirical research project that I undertook with FTC lawyer and economist James Cooper evaluating both the competitive effects and social harms from these state regulations of alcohol distribution.   For those who want to skip the background and get straight to the paper, here is the SSRN link to “State Regulation of Alcohol Distribution: The Effects of Post and Hold Laws on Output and Social Harms.”  The paper has also been released as part of the FTC Bureau of Economics working paper series.

But first, I want to set the table a little bit with a bit of background that motivated our research and then turn to discussing our results and their implications for the current CARE Act debate.

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The Comprehensive Alcohol Regulatory Effectiveness Act — yes, the “CARE Act” — or HR 5034, is a piece of legislation aimed at supporting “State-based alcohol regulation.”  Recall the Supreme Court’s decision in Granholm v. Heald, which held that states could either allow in-state and out-of-state retailers to directly ship wine to consumers or could prohibit it for both, but couldn’t ban direct shipment only for out-of-state sellers while allowing in for in-state sellers.  Most states thus far have opened up direct shipping laws to the benefit of consumers.    While we occasionally criticize the Federal Trade Commission from time to time here at TOTM, its own research demonstrating that state regulation banning direct shipment and e-commerce harmed consumers is an excellent example of the potential for competition research and development impacting regulatory debates.  Indeed, Justice Kennedy’s majority opinion in Granholm cites the FTC study (not to mention co-blogger Mike Sykuta’s work here) a number of times.  But in addition to direct shipment laws, there are a whole host of state laws regulating the sale and distribution of alcohol.  Some of them have obviously pernicious competitive consequences for consumers as well as producers.  The beneficiaries are the wholesalers who have successfully lobbied for the protection of the state.  Fundamentally, the CARE Act aims to place these laws beyond the reach of any challenge under the Commerce Clause as per Granholm, the Sherman Act, or any other federal legislation.  Whether the CARE Act has any ancillary social benefits is an important empirical question — but you can bet that the first-order effect of the law, if it were to go into effect, would be to increase beer, wine and liquor prices.  More on the CARE Act and state regulation of alcoholic beverages below the fold.

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