Ellig Wiseman Legislative Action And Market Response Wine 2005

Legislative Action and Market Response: Results of Virginia’s Natural Experiment with Direct Wine Shipment Alan Wiseman Department of Political Science, Ohio State U. Jerry Ellig Mercatus Center, GMU

The Constitutional Issue
21 st Amendment bans “transportation or importation into any State … of intoxicating liquors, in violation of the laws thereof.”
“ Section 2 [of the 21 st Amendment] does not allow States to regulate direct shipment of wine on terms that discriminate in favor of in-state producers.” -- Granholm v. Heald, 2005

Situation as of 2002
“ Three tier” system separates production, wholesaling, retailing
Many states require wine to pass through all 3 levels (some exceptions)
About half of states prohibit direct shipment from out-of-state sellers to consumers
7 states consider it a felony
About 30 states permit direct shipment from in-state sellers to consumers

Virginia and Direct Shipment
Banned interstate but allowed in-state wineries to ship direct to consumers
Bolick v. Danielson (2002) invalidated Virginia’s law
Virginia legalizes interstate direct shipping as of July 2003
Shipper must register with state and remit taxes

Not everyone can ship to VA …
Muscat dessert wine
Reply to: [email_address]
Date: 2005-11-15, 9:31AM EST
Muscat dessert wine. 500ml bottle. Bottle has been opened, one glass has been poured, bottle has been re-corked. I think I'll stick with chardonnay next time. Age verification will be required upon pick-up. ~Matt
this is in or around Montgomery Village, MD

Our Wine Sample
Wine and Spirits Survey of Top 50 selling wines in restaurants (83 bottles in 2002, 78 in 2004)
Price and availability gathered via Northern Virginia store visits, Winesearcher.com, winery web sites
Summer 2002 and Summer 2004
Shipping cost data from UPS
Bricks-and-mortar transport cost uses auto mileage rate
Sales tax omitted for both

Analysis of 2002 data
Price savings (including shipping costs)
8-13% on wines costing more than $20/bottle
20-21% on wines costing more than $40/bottle.
Increased variety
15% of a sample of popular wines available online were not available in Northern VA wine stores.

Why?
Ability to search vastly larger # of sellers nationwide
Cost to wholesaler of handling small amounts of lesser-known wines may be prohibitive
Online sellers may avoid some bricks-and-mortar costs
Wholesaler market power due to franchise regulation
Primary area of responsibility
Termination only for “good cause”
Tax evasion unlikely a big factor
VA excise tax on 750 ml 30 cents 2002 Online savings on bottle costing more than $20 $4.40-$7.19

Variety: 2002 vs. 2004
“ No wholesaler worth his salt would fail to market any quality product for which a demand can be demonstrated”
Boyden Gray, representing WSWA at FTC workshop in 2002
2002: 15% of wines available online not found in bricks-and-mortar stores
2004: 12.5% of wines available online unavailable in bricks-and-mortar stores
Following repeal of direct shipment bans, some wines still unavailable
Not significantly different from 2002

Lowest posted price: 2002 vs. 2004 72 99.99 7.69 15.12 22.00 Lowest online price 2004 63 89.99 7.99 15.88 24.21 Lowest offline price 2004 79 129.99 7.97 20.98 25.97 Lowest online price 2002 68 169.99 8.49 23.92 28.29 Lowest offline price 2002 N Max Min Stand Dev Mean

Percentage price spread, 2004 (excludes shipping costs)
(cheapest bricks and mortar price bottle i)-(cheapest online price bottle i)
(cheapest bricks and mortar price bottle i)
Average 8.97 percent less online
< $20 bottles are 7.6 percent less
≥ $20 bottles are 10.15 percent less
≥ $40 bottles are 21 percent less

Did Virginia’s Law Matter? Price spread is at least 6 points (40%) lower in 2004 % spread is higher for more expensive bottles May have fallen more for cheaper bottles No difference based on bottle popularity

Future Research
Have prices fully converged?
What does variability within the online and offline categories tell us about competition?
Who’s selling the least expensive online bottles?

Ellig Wiseman Legislative Action And Market Response Wine 2005

by Mercatus

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