Jerry Vachaparambil

Professor Mike Becker

Microeconomics
5/4/11
Monopolies in the United States of America
The subject of monopolies in the United States of America is broad enough to generate libraries
of literature dealing exclusively with that topic so this paper will focus on the nature of alcohol
and tobacco distribution in the United States of America. Each of these industries is massive
and requires a great deal of further study in itself but purposes of this paper will be satisfied by
a close focus on liquor distribution in the united states and how retailers acquire these
products. Despite its free-market inclinations, historically, the United States of America has not
provided a free market for the distribution of alcohol and black markets emerged to satisfy the
demand for alcoholic beverages. (1) From 1919 to 1933, there was a federal ban on production
and dissemination of alcoholic beverages which was commonly known as the prohibition. Even
today, certain states enforce a litany of regulations regarding the sale and consumption of
liquor. Many advocates of the free market are not even aware of the exceptions they tolerate
and even advocate because situations where these issues might be considered are not often a
part of the marketplace of ideas the modern university has evolved to become.
Though the term beverage control state and alcohol monopoly has nearly disappeared from
the colloquial vocabulary, many states still conduct or heavily restrict all the distribution of
distilled spirits within their jurisdiction. In other words, not only is the government picking and
choosing the winners but in many circumstances they are prohibiting competing interests from
vying for the rights to distribute beverages by usurping that role themselves. Without going into
great detail regarding why free market alternatives are superior to government monopolies and
government sanctioned cartels, it should be clear that the status quo is ripe with opportunities
for favoritism, nepotism, cronyism, and even consists of a narrowing of the tax base.
To briefly consider the state of the market that prevailed under prohibition: there would have
been no difference if the state had decided to grant an unrestricted monopoly to a single or a
few mafia organizations because that is what the market evolved into during the period of time
from 1919 to 1933. The repeal of prohibition transferred ownership and regulation of the
distribution networks to the state. Today, many states have some semblance of a free market in
place of the antiquated system that existed immediately after prohibition. Some of the most
heavily regulated states are taking initiatives to promote greater competition and disband the
state operated alcoholic beverage distribution networks.
At least five control states--Mississippi, Pennsylvania, Vermont, Virginia and Washington--
introduced legislation in 2010 that addressed privatization of alcohol sales or called for more
study of the issue. Most of the bills failed; however, an effort is underway in Washington to
place two initiatives on the ballot. (2)
As mentioned earlier, several states that sanction and conduct beverage sales to local retailers
are beginning to reconsider their standard operating procedure due to financial and logistical
burdens but this has been actively opposed by organizations such as Mothers against Drunk
Driving and other groups which engage in many positive activities that strengthen society but
also help maintain certain paradigms in the world of policy-making which have been difficult to
overcome. Another way that some states maintain protect the financial interests of political
patrons is by creating a quasi-monopoly by granting distribution privileges to certain
wholesalers and distributors. Granting these privileges to certain organizations which usually
organize and collectively call themselves euphemistic names such as Spirit and Wine
Distributors of Pennsylvania or Association of Beer Wholesalers renders the consumer demand
curve less elastic, for the consumer is deprived of substitute products from other potential
competitors. (3)
In response to the aforementioned scenario, critics of this viewpoint often assert that
consumers make their own demand curve inelastic but this assertion can be easily dismissed by
taking into consideration that consumers are unable to do so because the free market does not
truly exist in a scenario where trade is restricted within certain firms. If it has not been made
clear as of yet, the author of this paper has been convinced by the mountain of historical and
statistical evidence that supports a free market distribution system of products, including, but
not limited to alcoholic beverages. Forcing retailers to purchase products from governmental
entities, restricting purchasing behavior within certain geographic boundaries, and illegalizing
inter-state transport of certain legal products are all activities that most states engage in and
considerably hamper the tax-revenue potential of the states as well as the profit motives of
many of its citizens.
Clearly a major focus of this paper revolves around alcohol distribution and regulation but this
is not intended to ignore the fact that along with their distribution networks, certain tobacco
manufacturers maintain a near oligopoly on the American market share- when Philip Morris,
R.J. Reynolds, Lorillard, and Brown & Williamson were forced to sign a multi-billion dollar
Master Settlement Agreement in November 1998, outside analysts predicted a decline in sales,
stock prices, and profits- in fact the opposite has happened. (4) The activities of these
corporations are considered to be more acceptable because the MSA involved sacrifices on the
part of the corporations that grew their market share because of it and it did not restrict the
entry of new competitors into the marketplace- it only made it much more inconvenient for
them to prevail in a heavily saturated field because of the payouts they were forced to make to
become part of a level playing field.
A great example of the arguments presented in this paper regarding alcohol distribution is the
recent public debate in Michigan regarding the same issue. (5) In 1997, then-Gov. John Engler
and the Legislature debated and passed an attempted privatization of the previous state-owned
system. As a result of this legislation, several hundred state positions were eliminated, along
with the growing pension liabilities they accrued every year. The replacement did not turn out
to be a panacea and, in fact, greatly limited competition in the form of a price-controlled
oligopoly in which a handful of private distribution companies were granted exclusive licenses
to distribute liquor to the retail and hospitality industries.
Obviously, the main beneficiaries of this plan were not the citizens it claimed to help by
promoting greater competition or the retailers who were the main source of alcohol to
independent consumers within the state, but the cartel of politically connected interests who
promptly became a part of the alcohol distribution business. Predictably, the lack of
competition generated higher prices and lower volumes than would otherwise be the case. In
late 2010, recognizing the problems inherent in this policy, Gov. Jennifer Granholm proposed
selling distribution privileges to a single entity.
Clearly, the state of the Michigan alcohol distribution is a far cry from the state of the
marketplace in 1920 or even years after prohibition, but the fact remains that there is nothing
remotely similar to a free market in the alcoholic beverage distribution network in the United
States of America. It is easy for state, local, and even national legislators to attempt to get their
governmental unit out of the current situation by legislating remedies and creating new
agencies and programs to ensure a fair marketplace and the scope of this paper is too narrow
to determine specific policy prescriptions but it is clear that their past attempts have only been
successful at making the problem worse.









Works Cited
1. Hall, Wayne. "What are the policy lessons of National Alcohol Prohibition in the United
States, 1920-1933?" Addiction 105.7 (2010): 1164+. Academic OneFile. Web. 4 May.
2011.
2. "Alcohol for sale." State Legislatures 36.8 (2010): 8. Academic OneFile. Web. 4 May.
2011.
3. Rot hbar d, Mur r a y. Man, Economy, and St at e. 3r d. Aubur n, Al a ba ma:
Mi s e s I nst it ut e, 1962. 214- 19. eBook.
4. Le vy, Rober t A. "The To bac co Car t e l I s Al i ve a nd We l l . " I ndi v i dual
Li be rt y, Fr ee Marke t s, and Peac e. Cat o I nst it ut e, 07/ 14/ 2001. We b.
4 Ma y 2011.
5. Mc hugh, J ack. "Thi s Ti me I t s Li quor Di st r i but io n. " Mac ki na c
Ce nt er for Publ i c Po l i c y, 8/ 24/ 2010. We b. 4 Ma y 2011.