Strange Brew: Alcohol and Government Monopoly

By Glen Whitman

When prohibition ended in 1933, laws were passed that regulated the sale of alcoholic beverages, ostensibly to protect wholesalers from the depredations of suppliers and the public from the ill effects of alcohol. This book examines the monopoly protection laws, also known as franchise termination laws, and how they lock suppliers into government-mandated contracts with alcohol wholesalers that affect consumers by raising prices and reducing the quality of alcoholic products and services. This study also investigates the notion that alcohol consumption is a sin and how legal restrictions have substituted the moral judgment of legislators for that of the consumer. Strange Brew demonstrates that the monopoly protection laws reflect powerful special interests in the political process who use such measures to control markets, shield themselves from competition and consumer preferences, and set prices with relative impunity. This book will be of great value to those in the alcoholic beverage industry as well as to students of economics, regulation, and public policy.

• Language: English
• Publisher: Independent Publishers Group
• Release date: Sep 21, 2015
• ISBN: 9781598132625

Book preview

Strange Brew

Alcohol and Government Monopoly

Douglas Glen Whitman

Copyright ©2003 by The Independent Institute

The Independent Institute

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All rights reserved. No part of this book may be reproduced or transmitted in any form by electronic or mechanical means now known or to be invented, including photocopying, recording, or information storage and retrieval systems, without permission in writing from the publisher, except by a reviewer who may quote brief passages in a review.

ISBN: 0-945999-88-7

Library of Congress Catalog Number applied for.

Published by The Independent Institute, a nonprofit, nonpartisan, scholarly research and educational organization that sponsors comprehensive studies on the political economy of critical social and economic issues. Nothing herein should be construed as necessarily reflecting the views of the Institute or as an attempt to aid or hinder the passage of any bill before Congress.

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Chapter 1   Introduction

Chapter 2   The Three-Tier Structure of the Alcohol Industry

Chapter 3   Franchise Termination Laws and Their Effects

Chapter 4   Exclusive Territories

Chapter 5   Paternalistic Justifications for Franchise Termination Laws

Chapter 6   Conclusion

Notes

References

Index

About the Author

Although the Prohibition era ended almost seventy years ago, the alcoholic beverage industry remains one of the most regulated businesses in the United States. The Twenty-first Amendment to the Constitution, which repealed Prohibition, simultaneously set the stage for extensive state intervention in the production and distribution of alcohol: The transportation or importation into any state, territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited (Section 2). The inclusion of this section gave (or is often interpreted to have given) the states permission to continue restricting, in principle even prohibiting, the marketing of alcoholic beverages. In the years that followed passage of the amendment’ in 1934, the fifty states have implemented a menagerie of alcohol regulatory regimes.

Almost every state took steps to entrench a three-tier distribution system consisting of suppliers (brewers, vintners, and importers), wholesalers (also known as distributors), and retailers (liquor stores, restaurants, and so on). The alleged, and possibly original, intent of the system was to prevent vertical integration in the industry, which some commentators blamed for abuses in the pre-Prohibition era. The practical effect, however, was to inflate the market for alcohol wholesalers: the middlemen who stand between suppliers and retailers now claim a substantial share of the profits and raise prices to consumers in the process.

The interest of wholesalers in maintaining the three-tier system is apparent even to the idle observer. Although it is unlikely that a repeal of laws supporting that system would result in the disappearance of wholesalers, it would surely cut deeply into their profits, especially now that the Internet has substantially lowered the cost of direct contact between suppliers and their customers. It comes as no surprise that wholesalers’ associations regularly lobby federal and state legislatures for statutes that will enhance their economic well-being. Foremost among the laws favored by the wholesaler sector are the monopoly protection laws, also known as franchise¹ termination laws. These laws, implemented in almost every state for beer and in twenty states for wine and distilled spirits, shield wholesalers from competition by raising barriers to the termination of their contracts by suppliers.

In most cases, the monopoly protection laws require suppliers to show good cause for termination or nonrenewal of a contract even when the contracts in question specifically provide otherwise. What qualifies as good cause differs from state to state, but often the term is taken to rule out economic considerations such as failure to meet contractual sales quotas. The laws also typically require advance notice of termination, give wholesalers a month or more to cure any supposed problems, and prevent any contractual waiver of the law's mandates. In addition, they often provide for exclusive wholesaler territories. Among their overall effects, these monopoly franchise laws inhibit competition among wholesalers, raise prices, and (with the possible exception of exclusive territories, as explained later) reduce consumer welfare.

Following the repeal of Prohibition, responsibility for regulating the alcoholic beverage industry fell to the states, which adopted a variety of different approaches to the issue. Whereas the eighteen control states chose to monopolize the distribution and (sometimes) the sale of wine and spirits in the hands of the state government, most states—known as license states—chose instead to regulate the behavior of