Minimum Markup Laws and Multiproduct Pricing

This paper studies how minimum markup laws affect pricing in multiproduct retail markets. Exploiting the temporary suspension of Wisconsin’s Unfair Sales Act, we show that removing price floors lowers milk prices but raises cereal prices, consistent with retailers reallocating markups across products. We estimate a structural model of multiproduct demand and supply, developing a tractable correction for bias from non-exhaustive choice sets that is necessary to recover unbiased shopping costs and complementarities. Counterfactuals reveal that cross-subsidization plays a central role in retail competition: a 5% minimum markup reduces consumer surplus by 3.2%, while shutting it down entirely lowers welfare by 44%. *** ABSTRACT: This paper studies how minimum markup laws affect pricing in multiproduct retail markets. Exploiting the temporary suspension of Wisconsin’s Unfair Sales Act, we show that removing price floors lowers milk prices but raises cereal prices, consistent with retailers reallocating markups across products. We estimate a structural model of multiproduct demand and supply, developing a tractable correction for bias from non-exhaustive choice sets that is necessary to recover unbiased shopping costs and complementarities. Counterfactuals reveal that cross-subsidization plays a central role in retail competition: a 5% minimum markup reduces consumer surplus by 3.2%, while shutting it down entirely lowers welfare by 44%.