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


  • Katja Seim
  • Joel Waldfogel


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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  • Katja Seim & Joel Waldfogel, 2010. "Public Monopoly and Economic Efficiency: Evidence from the Pennsylvania Liquor Control Board's Entry Decisions," NBER Working Papers 16258, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16258
    Note: IO PE

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    References listed on IDEAS

    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. 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 245-252, December.
    3. 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.
    4. Small, Kenneth A & Rosen, Harvey S, 1981. "Applied Welfare Economics with Discrete Choice Models," Econometrica, Econometric Society, vol. 49(1), pages 105-130, January.
    5. 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.
    6. 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.
    7. Andrew Sweeting, 2010. "The effects of mergers on product positioning: evidence from the music radio industry," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 372-397.
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    1. Pennsylvania liquor stores are welfare maximizing
      by Economic Logician in Economic Logic on 2010-09-21 19:20:00


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    Cited by:

    1. Eugenio J. Miravete & Katja Seim & Jeff Thurk, 2017. "One Markup to Rule Them All: Taxation by Liquor Pricing Regulation," NBER Working Papers 24124, National Bureau of Economic Research, Inc.
    2. Matthew Gentzkow & Jesse M. Shapiro & Michael Sinkinson, 2014. "Competition and Ideological Diversity: Historical Evidence from US Newspapers," American Economic Review, American Economic Association, vol. 104(10), pages 3073-3114, October.
    3. Michael W. Walrath, 2016. "Entry Models Applied to Churches: Could Protestants use a Catholic Bishop to Solve Excess Entry?," Journal of Industrial Economics, Wiley Blackwell, vol. 64(3), pages 557-588, September.
    4. Griffith, Rachel & O'Connell, Martin & Smith, Kate, 2017. "Tax design in the alcohol market," CEPR Discussion Papers 11820, C.E.P.R. Discussion Papers.
    5. Jeff Thurk, 2015. "Measuring the Unequal Implications of One Size Fits All Regulation," 2015 Meeting Papers 1251, Society for Economic Dynamics.
    6. 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.
    7. Christos Genakos & Pantelis Koutroumpis & Mario Pagliero, 2014. "The Impact of Maximum Markup Regulation on Prices," CEP Discussion Papers dp1310, Centre for Economic Performance, LSE.
    8. Matthew Grennan & Robert Town, 2015. "Regulating Innovation with Uncertain Quality: Information, Risk, and Access in Medical Devices," NBER Working Papers 20981, National Bureau of Economic Research, Inc.
    9. Guillermo Díaz & Vincent Charles, 2016. "Regulatory design and technical efficiency: public transport in France," Journal of Regulatory Economics, Springer, vol. 50(3), pages 328-350, December.
    10. Mikhed, Vyacheslav & Scholnick, Barry, 2015. "Who is screened out of social insurance programs by entry barriers? Evidence from consumer bankruptcies," Working Papers 15-40, Federal Reserve Bank of Philadelphia.
    11. Barry Scholnick & Hyungsuk Byun, 2016. "Do Slot Machines Cause Bankruptcy? A Regulatory Natural Experiment with Exogenous Changes to Slot Locations," ERSA conference papers ersa16p607, European Regional Science Association.
    12. 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.
    13. Pozzi, Andrea & Schivardi, Fabiano, 2015. "Entry Regulation in Retail Markets," CEPR Discussion Papers 10836, C.E.P.R. Discussion Papers.
    14. 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.
    15. Rachel Griffith & Martin O'Connell & Kate Smith, 2017. "Design of optimal corrective taxes in the alcohol market," IFS Working Papers W17/02, Institute for Fiscal Studies.
    16. Mikhed, Vyacheslav & Scholnick, Barry, 2014. "Financial benefits, travel costs, and bankruptcy," Working Papers 14-18, Federal Reserve Bank of Philadelphia.
    17. Steven Berry & Alon Eizenberg & Joel Waldfogel, 2016. "Fixed Costs and the Product Market Treatment of Preference Minorities," Journal of Industrial Economics, Wiley Blackwell, vol. 64(3), pages 466-493, September.
    18. Rachel Griffith & Martin O'Connell & Kate Smith, 2017. "Tax design in the alcohol market," IFS Working Papers W17/28, Institute for Fiscal Studies.

    More about this item

    JEL classification:

    • 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

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