Nirupama Rao

The Cost of Curbing Externalities with Market Power: Alcohol Regulations and Tax Alternatives Founded in 1920, the NBER is a private, non-profit, non-partisan organization dedicated to conducting economic research and to disseminating research findings among academics, public policy makers, an...

Paper: www.nber.org/papers/w30896

Bottom line:
Post-and-hold laws ≠ corrective taxes.
They distort relative prices, lower welfare, and do little to curb externalities.
If you want less drinking (or less carbon, or less sugar), tax it. Don’t hand pricing power to firms.

The broader lesson: outsourcing externality regulation to firms with market power is a bad idea in differentiated product markets.

You don’t want Coke + Pepsi merging to fight obesity, or Exxon + Chevron merging to fight climate change.

Contrast with ethanol taxes:
✅ Raise price per unit of alcohol
✅ Reduce consumption of the products that matter most for harms
✅ Generate revenue for the public, not wholesalers

This pattern is negatively correlated with external harms.
👉 Consumers of cheap liquor cut back most when prices rise
👉 PH instead raises prices mostly on premium brands, pushing people to trade down, not drink less
Result: lower welfare, little impact on consumption.

You might ask: “But aren’t higher alcohol prices good if they reduce drinking?”

Not if the wrong products get the biggest markups.
PH markups vary with demand elasticity:
Huge on premium brands (Grey Goose, Smirnoff)
Tiny on cheap plastic-bottle vodkas

Theory first: PH softens competition. The unique equilibrium is monopoly-level prices, later matched by competitors.

So PH → higher prices than in states without these rules.

We spent years prying data out of CT regulators + industry groups. FOIA requests, tech hurdles, lobbying politicians.

The payoff: a unique dataset with wholesale price postings, shipments, and transactions across the supply chain.

What are post-and-hold (PH) laws?
👉 Wholesalers must post prices in advance
👉 Competitors can match but not beat them
👉 Prices are then held for 30 days
This makes undercutting impossible. About a dozen states use some version of this rule.

We study how “post-and-hold” (PH) pricing laws for distilled spirits in Connecticut shape competition, prices, and welfare. Spoiler: consumers lose, wholesalers win.

Thrilled that my paper "The Cost of Curbing Externalities with Market Power: Alcohol Regulations and Tax Alternatives" with
@cconlon.bsky.social
was accepted by the Journal of Political Economy
@jpolecon.bsky.social !

Thanks, Aaron! As always, you are too generous.

That’s very generous, Aaron! It was great fun and I really enjoyed hearing your take on so many key policy issues!