Public Monopoly and Economic Efficiency: Evidence from the Pennsylvania Liquor Control Board's Entry Decisions
AbstractWhile 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 InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16258.
Date of creation: Aug 2010
Date of revision:
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.
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- 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.
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
- L3 - Industrial Organization - - Nonprofit Organizations and Public Enterprise
- L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-21 (All new papers)
- NEP-COM-2010-08-21 (Industrial Competition)
- NEP-IND-2010-08-21 (Industrial Organization)
- NEP-REG-2010-08-21 (Regulation)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Pennsylvania liquor stores are welfare maximizing
by Economic Logician in Economic Logic on 2010-09-21 14:20:00
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- Public Monopoly and Economic Efficiency: Evidence from the Pennsylvania Liquor Control Board's Entry Decisions (AER 2013) in ReplicationWiki
- Economic Logic blog
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