The Truth About Alcohol Regulation

 

Last week’s reading of Stigler’s Theory of Economic Regulation got me thinking about regulations in the beer industry. The industry is heavily regulated and has a mandated three-tiered system, with wholesale distributors as middle men. This was created after Prohibition in an effort to control overconsumption. Critics of the industry (Stigler would be one) would tell you that wholesalers add no value to the industry and make undue profits. To this I have a few responses… 

First off, I want to say that the three-tiered system does benefit the consumer in that there is more variety to choose from. If there were no wholesalers, AB InBev (Anheuser-Busch), Miller-Coors, and Constellation Brands (Corona and Modelo) would control the entire market, pushing the small brewers out. To prove this, take a look at Coca-Cola and PepsiCo’s domination of the soda industry. Without distributors, the barriers to entry are enormous. Distribution is heavily reliant on economies of scale , and because of this new entrants would lose before they gain, which can be a risky undertaking. In the beer industry, new entrants do not need to make such large investments on the front end as they rely on distributors to take on those costs.

Secondly, I want to argue that the public safety of communities would be threatened without the three-tiered system we have in place today. Prior to Prohibition, there were what are called “tied-houses”. A tied-house is a restaurant or bar that is in some way obligated to a specific alcohol manufacturer. The manufacturer would offer deals such as low interest loans, discounted kegs, and free draft systems in exchange for being treated as a monopoly. This created dangerously low prices for beer. A worker could go into the pub and get intoxicated without making a dent in his paycheck (and workers did...often!). Industry giants were impossible to hold accountable when these tied-house saloons got out of hand. By contrast, the local, licensed wholesaler who by law cannot offer such deals can be very easily controlled. By using the wholesaler as a means to mandate higher prices and keep the industry in check at the local level, communities can ensure reasonably high prices that limit overconsumption. As we can all agree as economists, an increase in price decreases demand.

 

 I could go further into this topic, but given this is a blog post, I will stop here. Bottom line, wholesalers, while they do make a profit and benefit greatly from this system (they would be out of jobs without it), are not the only winners here. Consumers do in fact pay higher prices but this is for a greater good for society. On top of that, it is not all high prices and boring safety regulation for consumers: with the system craft beer can exist!