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The Economics of Interstate Direct Wine Sipping
Jerry ElligMercatus Center, George Mason University
Alan WisemanDepartment of Political Science, Ohio State University
What’s the issue?
What if there were no Commerce Clause?
21st Amendment lets states regulate importation of alcohol
Bans, reciprocity, limited shipment, felony states
Commerce Clause challenge arose because some states discriminate against out-of-state shippers
Virginia’s “natural experiment”
Focus of this paper
Have online and Virginia bricks-and-mortar prices fully converged, after taking shipping costs into account?
Convergence would suggest competition has increased
Absence of full convergence may indicate barriers to competition or important forms of nonprice competition
Virginia and Direct Shipment Timeline
April 2003:VA Gov. signs billto legalize direct shipment.
May 2005: Supreme Court rules that discriminatory shipment bans are unconstitutional
July 1, 2003: Direct Shipment to VA is legal.July 2002: Price and variety data
collected from online and bricks and mortar stores in Northern VA
March 29, 2002: Federal Judge finds VA direct shipment lawunconstitutional
April 1, 2002: Federal Judgeputs hold on ruling, pending appeal
July-August 2004: Price and variety datacollected from online and bricks and mortar stores in Northern VA
Why Northern VA is a good case study Relatively affluent suburbs
Likely to have numerous bricks-and-mortar wine stores Likely to have many informed wine consumers Likely to have consumers interested in online purchase
Wine is widely available (small shops, beverage superstores, warehouse clubs, groceries, 7-11s)
VA law explicitly seeks to encourage substitution of beer/wine for liquor
Virginia Direct Shipment Permits Applies to wineries, breweries, and retailers licensed in home
state
Application must identify specific brands
Virginia wholesaler must be notified
Seller can ship 2 cases/customer/month
4% sales tax, 40 cent/liter excise tax remitted to state
Age verification and adult signature at delivery
Not everyone can ship to VirginiaMuscat dessert wine Reply to: [email protected]: 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
(from Craig’s List)
Data
Sample: Wine and Spirits Annual Restaurant Poll Survey 2,112 restaurants in U.S.
Rank ten top selling wines “Top 50” from 2002 (83) “Top 50” from 2004 (78)
Virginia Data—All “wine retailers” (15) within 10-mile radius of McLean, VA
Online Data: Winesearcher.com, wineries
Transportation Costs
Bricks and Mortar Stores Standard government reimbursement for mileage Multiplied times round-trip distance to store
Online Stores -- Data drawn from UPS Shipping costs for boxes of appropriate size and weight Various shipping times considered
Average transportation costs established by dividing total transportation costs (online or offline) by relevant number of bottles (1, 6, 12)
Cost Comparison Calculations Total Costs of Bottles
Lowest (online/offline) retail bottle price +
relevant shipment/transportation costs =
total online/offline bottle price Cost Comparisons
Lowest total online bottle price –
Lowest total offline bottle price =
“Cost Savings/Extra Expenses when purchasing online”
Mean Cost Savings (or Extra Expenses) per Bottle When Shopping
Online for Entire SampleCategory 2002
N=67
2004
N=63
Online Savings (No Transportation Costs) 5.838** 3.048**
Online Savings (UPS Ground Service-Buying 1 Bottle) 1.507 -1.45*
Online Savings (UPS 3rd Day Air—1 Bottle) -2.443* -5.17**
Online Savings (UPS 2nd Day Air—1 Bottle) -7.256** -9.59**
Online Savings per Bottle (UPS Ground Service—6 Bottles) 3.342** 1.45**
Online Savings per Bottle (UPS 3rd Day Air—6 Bottles) 0.707 -0.599
Online Savings per Bottle (UPS 2nd Day Air—6 Bottles) -0.767 -2.91**
Online Savings per Bottle (UPS Ground Service—12 Bottles) 3.543** 1.601**
Online Savings per Bottle (UPS 3rd Day Air—12 Bottles) 1.353 -0.120
Online Savings per Bottle (UPS 2nd Day Air—12 Bottles) 0.110 -2.17**
Average posted prices lower online Transportation costs eat up savings, except for 6 or 12 bottles via UPS ground Online price advantage expressed in $ fell from 2002-2004 Percentage price spread fell by 40 percent (Wiseman and Ellig 2005)
Mean Cost Savings (or Extra Expenses) per Bottle When
“Comparison Shopping” for Entire Sample
Category 2002
N=67
2004
N=63
Online Savings (No Transportation Costs) 5.974** 3.720**
Online Savings (UPS Ground Service-Buying 1 Bottle) 3.569** 1.991**
Online Savings (UPS 3rd Day Air—1 Bottle) 2.207* 1.991**
Online Savings (UPS 2nd Day Air—1 Bottle) 1.629 0.413
Online Savings per Bottle (UPS Ground Service—6 Bottles) 4.201** 2.635**
Online Savings per Bottle (UPS 3rd Day Air—6 Bottles) 2.752** 1.737**
Online Savings per Bottle (UPS 2nd Day Air—6 Bottles) 2.276* 1.007**
Online Savings per Bottle (UPS Ground Service—12 Bottles) 4.303** 2.671**
Online Savings per Bottle (UPS 3rd Day Air—12 Bottles) 3.020** 1.871**
Online Savings per Bottle (UPS 2nd Day Air—12 Bottles) 2.477** 1.203**
Comparison shopping yields substantial savings Savings from comparison shopping decreased from 2002-2004
Mean Cost Savings (or Extra Expenses) per Bottle When Shopping Online for wines ≥$20/bottleCategory 2002
N=36
2004
N=27
Online Savings (No Transportation Costs) 9.435** 5.884**
Online Savings (UPS Ground Service-Buying 1 Bottle) 5.512** 2.251
Online Savings (UPS 3rd Day Air—1 Bottle) 1.526 -1.481
Online Savings (UPS 2nd Day Air—1 Bottle) -3.693 -5.909**
Online Savings per Bottle (UPS Ground Service—6 Bottles) 7.027** 4.403**
Online Savings per Bottle (UPS 3rd Day Air—6 Bottles) 4.396* 2.372*
Online Savings per Bottle (UPS 2nd Day Air—6 Bottles) 2.912 0.034
Online Savings per Bottle (UPS Ground Service—12 Bottles) 7.194** 4.482**
Online Savings per Bottle (UPS 3rd Day Air—12 Bottles) 5.005** 2.786**
Online Savings per Bottle (UPS 2nd Day Air—12 Bottles) 3.654 0.698
Mean Cost Savings (or Extra Expenses) per Bottle When Shopping Online for wines <$20/bottleCategory 2002
N=36
2004
N=27
Online Savings (No Transportation Costs) 1.661* 0.921**
Online Savings (UPS Ground Service-Buying 1 Bottle) -3.14** -4.23**
Online Savings (UPS 3rd Day Air—1 Bottle) -7.05** -7.94**
Online Savings (UPS 2nd Day Air—1 Bottle) -11.4** -12.35**
Online Savings per Bottle (UPS Ground Service—6 Bottles) -0.93** -0.76***
Online Savings per Bottle (UPS 3rd Day Air—6 Bottles) -3.58** -2.83**
Online Savings per Bottle (UPS 2nd Day Air—6 Bottles) -5.04** -5.12**
Online Savings per Bottle (UPS Ground Service—12 Bottles) -0.697 -0.56
Online Savings per Bottle (UPS 3rd Day Air—12 Bottles) -2.89** -2.299**
Online Savings per Bottle (UPS 2nd Day Air—12 Bottles) -4.22** -4.32**
Why haven’t prices fully converged? Only one year after shipment ban was repealed
Supreme Court case not yet decided in 2004
Valuable niche exists for purchasing products in real time
Characteristics of Virginia’s direct shipment law that limits de facto threat of online competition. Impact of quantity limits on price competition?
Conclusions
Legalization has narrowed, but not eliminated, online-offline price differentials
Possible explanations for existing differential Timing Competition still inhibited? Nonprice attributes of visiting wine stores
Results consistent with economic theories emphasizing potential for e-commerce to facilitate more efficient and competitive markets
Consistent with logic supporting Commerce Clause
