Cooper and Wright Working Paper Cited in Congressional CARE Act Hearing

Josh Wright —  3 October 2010

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.