Aim: The demand for alcohol has been demonstrated repeatedly to be sensitive to price changes. However, estimated price elasticities vary by study region and over time. One explanation for these variations might be that different countries or parts of countries have had different alcohol control systems. The hypothesis addressed in this study was that a regulated market leads to higher transaction costs associated with purchasing alcohol, which in turn increases the full price of the beverages (the nominal cash price plus transaction costs). As a result, the cash price of alcohol represents a smaller part of the full price in a highly regulated market. Assuming that customers respond primarily to changes in full price, the demand for alcohol should be less sensitive to changes in cash price where regulation is stricter. This study examined whether variations in price elasticities were a function of the different regulatory systems in control and license states in the United States during the period 1982-99.
Data and methods: Time-series cross-sectional analyses (in 50 states over 18 years) were conducted. Elasticities were estimated using a multiplicative model based upon first-differences of time-series within states. Disposable income and other socio-demographic variables were used as control variables. All data were obtained from archival sources.
Findings: The demand for spirits and beer were significantly more sensitive to price changes in license states than in control states. The estimated price elasticity for wine sales was also somewhat larger in license states, but not significantly so.
Conclusion: The lower price elasticities for spirits and beer in the control states support the hypothesis that customers respond primarily to changes in the full price of alcohol.