Legislative Action and Market Response: Results of Virginia’s Natural Experiment with Direct Wine Shipment

Alan WisemanDepartment of Political Science,

Ohio State U.

Jerry ElligMercatus Center, GMU

The Constitutional Issue

21st Amendment bans “transportation or importation into any State … of intoxicating liquors, in violation of the laws thereof.”

“Section 2 [of the 21st 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: sale-111360700@craigslist.orgDate: 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 cents2002 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

Mean Stand Dev Min Max N

Lowest offline price 2002

28.29 23.92 8.49 169.99 68

Lowest online price 2002

25.97 20.98 7.97 129.99 79

Lowest offline price 2004

24.21 15.88 7.99 89.99 63

Lowest online price 2004

22.00 15.12 7.69 99.99 72

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?

Variable (1) (2) (3) (4)

2004 Data -0.069 (2.55)

-0.057 (2.27)

-0.106 (2.42)

-0.107 (2.42)

Avg. Bottle Price (Offline)

0.003 (5.21)

0.002 (4.00)

0.002 (4.01)

2004 Data x Avg. Bottle Price

0.002 (1.68)

0.002 (1.70)

Bottle Popularity 0.000 (0.40)

Constant 0.158

(10.00)

0.080 (3.78)

0.093 (4.08)

0.083 (2.49)

N 130 130 130 130

Adjusted R2 0.04 0.16 0.16 0.16

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?