The challenges of operating in a competitive market gives many business owners sleepless nights — a good thing for consumers. More innovative and efficient competitors often spring up unexpectedly and remake whole industries, improving products and driving down costs. Dell, Wal-Mart, Netflix.com and Amazon.com are great examples of firms that helped reinvent commerce by eliminating middlemen and challenging staid distribution systems.
That is exactly what does not happen in Michigan’s beer and wine markets, thanks in part to an archaic rule on beer and wine producers and wholesalers called “post and hold.” The rule limits competition and effectively imposes a form of government-facilitated price collusion.
Michigan’s “post” rule requires manufacturers and wholesalers to submit product price changes to the Michigan Liquor Control Commission; a “hold” rule then prohibits them from changing that price for a particular length of time that varies by product. The result is a form of legal price collusion in which firms can coordinate pricing with their “competition.”
The “hold” period for beer is a whopping 180 days; for wine it is three months, with exceptions only allowed upon a written order of the commission.
Research shows that such rules raise the prices paid by consumers between 6.4 percent and 30 percent depending on the product. A report by James Cooper of the Federal Trade Commission and Joshua Wright of George Mason University suggests that post and hold rules nationwide add between 93 cents and $2.24 to the price a consumer pays for a six pack of beer, and between 39 cents and $1.10 to a bottle of wine.
According to Julie Wendt, Director of the Executive Services Division at the MLCC, the post rule originated in a post-Prohibition federal regulation adopted in 1933. Michigan’s version was first adopted for wine in 1941. An “emergency” post rule was imposed on Michigan beer makers and wholesalers in 1953 when similar federal regulations were rescinded. A three-month hold rule for wine makers and wholesalers was imposed here in 1970; and the current 180 day hold rule for beer in 1972.
These dirty little secrets were first brought to the public’s attention by Gov. William Milliken, as described in an April 4, 1979, Detroit Free Press article, “Beer profiteering probed.” It began, “Escalating beer prices were the target of Gov. Milliken’s criticism Tuesday as he called for a review of the state’s liquor control system, which a federal anti-trust attorney says fosters legal price-fixing in the beer industry.”
More than 30 years later, the Mackinac Center asked the MLCC directly why these post and hold rules are still justified. The response from Chairman Deloney, through a spokesperson, was that “It is not readily apparent which arguments — pro or con — the Commission found compelling when it promulgated the rule.”
No kidding, but that does not explain why the rules continue to exist today. Recently, Michigan’s Licensing and Regulatory Affairs department made dozens of recommendations for reforming the state’s alcohol control system, but repeal of these anti-consumer “post and hold” rules was not among them. Michigan consumers should ask “Why?” and also challenge lawmakers to add repeal of post and hold rules should they take up the reform recommendations in the next year or so.
Post and hold is not Michigan’s only rule that harms consumers. Exclusive territory mandates force beer and wine producers to give wholesalers virtual monopolies, all but guaranteeing higher than normal prices. A 1993 study published in the Journal of Law and Economics found that mandated exclusive territories increased the cost of beer by 7 percent.
Think about the estimates made from higher costs associated with special rules and one component of law that unnecessarily drives up the cost of beer. If post and hold rules drive up the cost only 5 percent and exclusive territory mandates just another 5 percent (far below scholarly measures), then we’re talking about a 10 percent hike in costs over just two items that are basically designed solely to fatten the wallets of politically well-connected special interests. Could anything be more unfair?
If the bureaucrats continue to cater to those special interests, the Michigan Legislature should proceed to fix this broken system on their own, and if legislators fail, beer and wine buyers should take this into consideration in future primary and general elections.
Michael D. LaFaive is director of the Morey Fiscal Policy Initiative and Ethan Davis is a 2012 fiscal policy intern at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the authors and the Center are properly cited.