Wine Distribution and Government Regulation

WINE DISTRIBUTION AND GOVERNMENT REGULATION

1. What is wine distribution?

a. Delivering wine to consumers

1. Sales

2. Transportation

2. Wine distribution channels

a. Direct to consumer channel

b. Direct to retailer channel

c. Three-tier channel

3. Factors that affect choice of channel(s)

a. Profit

b. Revenue

c. Cost

d. State regulations

4. Three-tier channel

a. Government franchise laws

b. Vertical integration laws

c. Licensing laws

d. Territory laws

e. Distributor franchise laws

f. Warehouse laws

g. Cash-only laws

h. Retail-sales laws

i. Price controls

1. Post and hold

2. Price discrimination

3. Discounting

4. Minimum markup

5. Direct-to-retailer channel

a. In-state wine producers

b. Out-of-state wine producers

6. Direct-to-consumer channel

a. Tasting room sales

b. In-state wine producers

b. Out-of-state wine producers

c. Granholm v. Heald

d. Consumption caps

1. Minnesota. Single consumer not more than 2 cases per year

2. Michigan. All consumers not more than 1,500 cases per year

e. Production caps

1. Arizona. Less than 8,400 cases per year

2. Ohio. Less than 105,000 cases per year

7. Economic analysis of government regulation

a. Why do states regulate the distribution and sale of wine?

b. Why do different states have different regulations?

c. What are the economic effects on producers, consumers, distributors, retailers, consumers?

8. Why do states regulate the distribution and sale of wine?

a. What is the economic rationale for wine regulation?

b. Why do state governments choose to regulate wine?

9. Economic rationale for wine regulation

a. Market imperfections (failure)

1. External cost

2. Imperfect information

3. Market power

10. Policy tools to correct wine market imperfections

a. Regulation

b. Taxes and subsidies

11. Why do states choose to regulate wine

a. Public interest theory of regulation

1. Objective of legislators

2. Demand for regulation

3. Supply of regulation

b. Economic theory of regulation

1. Objective of legislators

2. Demand for regulation

3. Supply of regulation

4. Price of regulation

5. Willingness and ability to pay for regulation

c. Which theory provides the best explanation of legislator behavior?

1. After Prohibition ended

2. Past 50 years

a. Winners and losers

1. Government franchise laws

2. Vertical integration laws

3. Licensing laws

4. Territory laws

5. Distributor franchise laws

6. Direct shipping laws (producer, retailer)

7. Price controls

5. Laws applying to all alcoholic beverages

d. Empirical evidence

1. Riekhof and Sykuta (2005) study

a. States with larger distributors are more likely to prohibit shipping

b. States with a larger wine industry are more likely to have laws that

benefit wine producers

c. States with a higher incidence of drunk driving are more likely to allow

shipping

2. Rickard et al. (2011) study

a. States that allow grocery store wine sales have 7% lower wine prices

and 50% higher per capita wine consumption

b. States that consume more wine relative to beer and spirits have lower

traffic fatality rates

3. Ellig and Wiseman (2007, 2011) studies

a. Analyzed data for Virginia

b. In 2003, Virginia allowed out-of-state wine producers and retailers to

ship directly to Virginia consumers

c. Competition from online retailers decrease the average price of wine by 25%

d. Competition from out-of-state producers had no effect on price, but

increased the variety of wines available to consumers

e. A shipping production cap of 55,000 cases results in higher wine prices and

decreased availability of wines for consumers