Market Structure and Competition: Evidence from a Natural Experiment in Liquor Licensure

Abstract

Washington state licensed private retailers to sell spirits for the first time in May 2012, but only if their premises exceeded 10,000ft. This restriction generates exogenous variation in the number of retailers across local liquor markets, which we leverage to estimate the causal effects of market structure on equilibrium outcomes. We find that spirits purchasing increases by 63% when moving from monopoly to duopoly markets, and that this increase is concentrated among the heaviest-drinking households. These results support the notion that local liquor availability can dramatically increase consumption. However, these effects dissipate quickly as the number of competitors increases, highlighting that the square-footage based licensure rule is a blunt policy tool. Surprisingly, price competition does not play an important role in the observed quantity increase. Instead, we find that firms compete in product assortment, tailoring product mix to the local competitive environment while holding prices fixed.

JEL Classification: D43, L43, L66