Viewpoint
Ohio's Direct Shipping Law
The ongoing debate over direct shipment recently took an interesting turn in Ohio. Beginning Oct. 1, direct shipment from wineries to consumers became legal, but only as long as the winery in question produced less than 150,000 gallons of wine annually. The new regulations are ostensibly non-discriminatory, in the sense that they apply to both in-state and out-of-state wine producers. As a matter of fact, however, the overwhelming majority of Ohio wine producers fall well below the 150,000-gallon cap, so in practical terms, the law clearly discriminates against out-of-state producers.
Certain lawmakers were very clear that this was the intention behind the legislation: to promote Ohio's developing wine industry. Whether these new regulations will withstand legal challenge in light of the Supreme Court's 2005 Granholm ruling remains to be seen.
Legal questions aside, who benefits from the new laws? Clearly, Ohio's wine industry could gain from the new policy with increased direct shipment to Ohio consumers, but the greatest beneficiaries from the new regulations are likely to be the wholesalers, who have effectively guaranteed that they will be a necessary link between producers and consumers in the wine distribution chain. Since direct shipment from larger wine producers into Ohio is forbidden, consumers who seek highly desired bottles from these larger producers will have no other options beyond what they can find at Ohio retail outlets, which will be drawing their supplies exclusively from Ohio wholesalers.
Furthermore, if larger out-of-state wineries offer substantial discounts compared to the prices in Ohio wine stores, Ohio consumers will not be able to take advantage of these savings. By limiting direct shipment to wineries under the 150,000-gallon cap, Ohio lawmakers have guaranteed that wholesalers maintain control over the lion's share of the wine industry.
In light of these realities, it might appear that nothing in this law benefits consumers. Well, not quite. A less-publicized feature of the new Ohio liquor regulations is the legalization of direct shipping from wineries to Ohio retailers, as long as the winery falls under the 150,000-gallon cap. In other words, not only can smaller-production wineries ship directly to consumers, but they can ship directly to retailers.
How might this help Ohio consumers? One pervasive feature of Ohio liquor regulations is a two-stage minimum markup system, whereby wholesalers add a 33.3% markup to a bottle's base price before they sell it to a retailer, followed by a retailer adding a 50% markup to that price before selling the bottle to a consumer. By bypassing the wholesaler link altogether, Ohio retailers will only have to mark up bottles they receive directly from wineries by 50%, effectively providing them with a 33% buffer with which to engage in price competition with other retailers, especially those who do not receive direct shipments from wineries.
In a paper that we published in the August 2007 issue of the Journal of Politics, we demonstrated that legalization of direct shipment in the state of Virginia clearly led to more competitive retail markets. First, the difference between the lowest bricks-and-mortar price in the McLean, Va., area and the lowest price that could be found online decreased by approximately 40% following the legalization of direct shipment. Second, any remaining price disparity between Virginia bricks-and-mortar stores and online (out-of-state) stores was related to interstate shipping costs; there was no such relationship when direct shipment was illegal.
Unless Ohio also repeals its minimum markup laws, widespread legalization of direct shipment would not have similar effects, because Ohio retailers could not legally cut their prices to meet online competition. But by allowing Ohio retailers to cut out the middleman for smaller-production wines, lawmakers have provided a means by which retailers can engage in greater price competition on these wines. Of course, such price competition can only occur for smaller-production wines, and it will only occur if retailers are willing and able to break their links with wholesalers to source directly from smaller wineries.
In terms of price and selection, the best law for consumers would have been one that allowed direct shipment from all sizes of wineries and also eliminated the minimum markup law. Nevertheless, the possibility for some real price competition in Ohio definitely exists, and it will be very interesting to see how the new law affects consumer choice and variety in the Buckeye State.
Alan E. Wiseman is an assistant professor of political science at Ohio State University. Jerry Ellig is a senior research fellow, Mercatus Center, at George Mason University. While working for the Federal Trade Commission, Wiseman and Ellig conducted the first large-sample empirical analysis of the market impacts of direct shipment bans for wine. This research was incorporated into the 2003 FTC staff report on electronic commerce in wine, which was cited extensively by the Supreme Court in its 2005 Granholm ruling.
Certain lawmakers were very clear that this was the intention behind the legislation: to promote Ohio's developing wine industry. Whether these new regulations will withstand legal challenge in light of the Supreme Court's 2005 Granholm ruling remains to be seen.
Legal questions aside, who benefits from the new laws? Clearly, Ohio's wine industry could gain from the new policy with increased direct shipment to Ohio consumers, but the greatest beneficiaries from the new regulations are likely to be the wholesalers, who have effectively guaranteed that they will be a necessary link between producers and consumers in the wine distribution chain. Since direct shipment from larger wine producers into Ohio is forbidden, consumers who seek highly desired bottles from these larger producers will have no other options beyond what they can find at Ohio retail outlets, which will be drawing their supplies exclusively from Ohio wholesalers.
Furthermore, if larger out-of-state wineries offer substantial discounts compared to the prices in Ohio wine stores, Ohio consumers will not be able to take advantage of these savings. By limiting direct shipment to wineries under the 150,000-gallon cap, Ohio lawmakers have guaranteed that wholesalers maintain control over the lion's share of the wine industry.
In light of these realities, it might appear that nothing in this law benefits consumers. Well, not quite. A less-publicized feature of the new Ohio liquor regulations is the legalization of direct shipping from wineries to Ohio retailers, as long as the winery falls under the 150,000-gallon cap. In other words, not only can smaller-production wineries ship directly to consumers, but they can ship directly to retailers.
How might this help Ohio consumers? One pervasive feature of Ohio liquor regulations is a two-stage minimum markup system, whereby wholesalers add a 33.3% markup to a bottle's base price before they sell it to a retailer, followed by a retailer adding a 50% markup to that price before selling the bottle to a consumer. By bypassing the wholesaler link altogether, Ohio retailers will only have to mark up bottles they receive directly from wineries by 50%, effectively providing them with a 33% buffer with which to engage in price competition with other retailers, especially those who do not receive direct shipments from wineries.
In a paper that we published in the August 2007 issue of the Journal of Politics, we demonstrated that legalization of direct shipment in the state of Virginia clearly led to more competitive retail markets. First, the difference between the lowest bricks-and-mortar price in the McLean, Va., area and the lowest price that could be found online decreased by approximately 40% following the legalization of direct shipment. Second, any remaining price disparity between Virginia bricks-and-mortar stores and online (out-of-state) stores was related to interstate shipping costs; there was no such relationship when direct shipment was illegal.
Unless Ohio also repeals its minimum markup laws, widespread legalization of direct shipment would not have similar effects, because Ohio retailers could not legally cut their prices to meet online competition. But by allowing Ohio retailers to cut out the middleman for smaller-production wines, lawmakers have provided a means by which retailers can engage in greater price competition on these wines. Of course, such price competition can only occur for smaller-production wines, and it will only occur if retailers are willing and able to break their links with wholesalers to source directly from smaller wineries.
In terms of price and selection, the best law for consumers would have been one that allowed direct shipment from all sizes of wineries and also eliminated the minimum markup law. Nevertheless, the possibility for some real price competition in Ohio definitely exists, and it will be very interesting to see how the new law affects consumer choice and variety in the Buckeye State.
Alan E. Wiseman is an assistant professor of political science at Ohio State University. Jerry Ellig is a senior research fellow, Mercatus Center, at George Mason University. While working for the Federal Trade Commission, Wiseman and Ellig conducted the first large-sample empirical analysis of the market impacts of direct shipment bans for wine. This research was incorporated into the 2003 FTC staff report on electronic commerce in wine, which was cited extensively by the Supreme Court in its 2005 Granholm ruling.
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