Don't Tread on Me Anymore

Costco, a membership warehouse chain known for its large discounts on a variety of items, also happens to be one of the largest retailers of wine in the world. However, due to alcohol regulation laws imposed by a majority of states, retailers of alcohol (like Costco) cannot buy directly from the manufacturer, but must instead purchase through a distributor. This causes the price of alcoholic beverages to be kept artificially high, that is to say not the price an unregulated market would supply. The two articles presented here describe Costco’s desire and ongoing efforts to deregulate the wine industry by cutting out the middle man (the distributor) and buying straight from the manufacturers (the wineries). If Costco is successful, it will be able to reduce the cost of the wine it’s selling substantially, thereby increasing quantity sold and profit made.

These articles reference a number of points that we have hit in class. First of all, there is a substantial amount of rent-seeking money involved in trying to influence alcohol distribution laws. Costco alone has spent over $500,000 dollars trying to change the law, while on the other side The Wine and Spirits Wholesalers of America have spent millions to keep the present laws in place. While it will undoubtedly by worth the winners’ efforts (in many billions of dollars for one industry or another), the loser will have wasted resources which could have been used elsewhere resulting in a dead weight loss to society.

Secondly, and more importantly to recent class discussion, these articles support George Stigler’s theory of economic regulation. Following the end of prohibition, the states were given the power to regulate alcohol in a way of their own choosing. This led to the creation of wine (and other alcoholic) wholesaler industries which have become powerful players in today’s political and economic landscape. Because industries engaged in political markets, such as distributors, are rational, it is normal (according to Stigler) for them to seek regulation as a way of increasing profit. ABC stores enjoy the price regulation that the government currently provides as it creates for them a de-facto monopoly. It is rational for industries that have the influence to seek regulations to do so. While Costco might seem like a counter-argument to Stigler’s theory (by their efforts to deregulate the wine market), Costco is simply acting in the rational manner Stigler describes – that is, Costco is seeking to deregulate because the current regulation is hurting them. Should Costco succeed, it would be rational for Costco to seek different kinds of regulation perhaps in the form of entry controls to the market (I believe Costco and Stigler would agree).