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Complexity, Efficiency, and Fairness of Multi-Product Monopoly Pricing

Author

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  • Miravete, Eugenio J
  • Seim, Katja
  • Thurk, Jeff

Abstract

The Pennsylvania Liquor Control Board administers the purchase and sale of wine and spirits across the state and is legally mandated to charge a uniform 30% markup on all products. We use an estimated discrete choice model of demand for spirits, together with information on wholesale prices, to assess the welfare and redistribution implications of the chosen uniform markup rule. We find that it reduces welfare significantly, but mimics the optimal behavior of a multi-product monopolist. Relative to product-specific prices, the uniform prices do not exploit the observed heterogeneity of consumption across products and demographic groups reflected in relative spirit demand elasticities. They implicitly tax high-income and educated households by overpricing their favored spirit varieties. Our estimated returns to very sophisticated pricing strategies are small indicating the use of more complex pricing mechanisms as being neither socially desirable nor privately profitable.

Suggested Citation

  • Miravete, Eugenio J & Seim, Katja & Thurk, Jeff, 2013. "Complexity, Efficiency, and Fairness of Multi-Product Monopoly Pricing," CEPR Discussion Papers 9641, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9641
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    References listed on IDEAS

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    Cited by:

    1. Christos Genakos & Pantelis Koutroumpis & Mario Pagliero, 2014. "The Impact of Maximum Markup Regulation on Prices," CEP Discussion Papers dp1310, Centre for Economic Performance, LSE.
    2. Chen, Chia-Wen, 2014. "Estimating the foreclosure effect of exclusive dealing: Evidence from the entry of specialty beer producers," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 47-64.

    More about this item

    Keywords

    Complex Pricing; Multi-Product Price Discrimination; Taxation by Regulation;

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises

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