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Public Monopoly and Economic Efficiency: Evidence from the Pennsylvania Liquor Control Board's Entry Decisions

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  • Katja Seim
  • Joel Waldfogel

Abstract

While private monopolists are generally assumed to maximize profits, the goals of public enterprises are less well known. Using the example of Pennsylvania's state liquor retailing monopoly, we use information on store location choices, prices, wholesale costs, and sales to uncover the goals implicit in its entry decisions. Does it seek to maximize profits or welfare? We estimate a spatial model of demand for liquor that allows us to calculate counterfactual configurations of stores that maximize profit and welfare. We find that welfare maximizing networks have roughly twice as many stores as would maximize profit. Moreover, the actual network is much more similar in size and configuration to the welfare maximizing configuration. An alternative to a state monopoly would be the common practice of regulated private entry. While such regimes can give rise to inefficient location decisions, little is known about the size of the resulting inefficiencies. Even for a given number of stores, a simple characterization of free entry with our model results in a store configuration that produces welfare losses of between 3 and 9% of revenue. This is a third to half of the overall loss from unregulated free entry.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16258.

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Date of creation: Aug 2010
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Publication status: published as Katja Seim & Joel Waldfogel, 2013. "Public Monopoly and Economic Efficiency: Evidence from the Pennsylvania Liquor Control Board's Entry Decisions," American Economic Review, American Economic Association, vol. 103(2), pages 831-62, April.
Handle: RePEc:nbr:nberwo:16258

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  1. Peter Davis, 2006. "Spatial competition in retail markets: movie theaters," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 964-982, December.
  2. Cook, Philip J. & Moore, Michael J., 2000. "Alcohol," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 30, pages 1629-1673 Elsevier.
  3. Harvey S. Rosen & Kenneth A. Small, 1979. "Applied Welfare Economics with Discrete Choice Models," NBER Working Papers 0319, National Bureau of Economic Research, Inc.
  4. Steven T. Berry & Joel Waldfogel, 1999. "Free Entry and Social Inefficiency in Radio Broadcasting," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 397-420, Autumn.
  5. Boardman, Anthony E & Vining, Aidan R, 1989. "Ownership and Performance in Competitive Environments: A Comparison of the Performance of Private, Mixed, and State-Owned Enterprises," Journal of Law and Economics, University of Chicago Press, vol. 32(1), pages 1-33, April.
  6. de Palma, Andre & Ginsburgh, Victor & Thisse, Jacques-Francois, 1987. "On Existence of Location Equilibria in the 3-Firm Hotelling Problem," Journal of Industrial Economics, Wiley Blackwell, vol. 36(2), pages 245-52, December.
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  1. Pennsylvania liquor stores are welfare maximizing
    by Economic Logician in Economic Logic on 2010-09-21 14:20:00
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Cited by:
  1. Matthew Gentzkow & Jesse M. Shapiro & Michael Sinkinson, 2012. "Competition and Ideological Diversity: Historical Evidence from US Newspapers," NBER Working Papers 18234, National Bureau of Economic Research, Inc.
  2. Dai, Mian & Yuan, Yuan, 2013. "Product differentiation and efficiencies in the retail banking industry," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4907-4919.
  3. Eugenio J. Miravete & Katja Seim & Jeff Thurk, 2014. "Complexity, Efficiency, and Fairness of Multi-Product Monopoly Pricing," CESifo Working Paper Series 4692, CESifo Group Munich.

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  1. Economic Logic blog
  2. Public Monopoly and Economic Efficiency: Evidence from the Pennsylvania Liquor Control Board's Entry Decisions (AER 2013) in ReplicationWiki

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