Essays on Mandated Vertical Restraints

This dissertation examines the impact mandated vertical restraints have on market outcomes using the US brewing industry. In particular, I examine the impact of beer franchise laws, which restrict when a brewer can end a contract with a wholesaler, mandated exclusive territories which require a brewer to grant a geographic region to a wholesaler in which no other wholesaler is allowed to sell the contracted brands, and divorcement of brewers and wholesalers, which are laws that prohibit brewers from wholesaling their products to retailers. The first chapter explains the industry and these restraints in detail. The second chapter examines the impact of franchise termination laws, mandated exclusive territories, and prohibitions of vertical integration between brewers and wholesalers on the entry and production decisions of craft brewers in the US beer market. I identify the effects by exploiting variation in policies across states and time between 1984 and 2013. I estimate that franchise termination laws significantly reduced net brewery entry and craft beer production. The impact is larger in states that prohibit self-distribution by brewers. Mandated exclusive territories reduced brewery entry as well, though the estimates are not statistically significant in all specifications and are estimated to have very little effects on production. Lastly, allowing vertical integration between brewers and wholesalers accounts for 60-78% of the difference in the number of breweries between states that prohibit integration and led to 178-251% more craft beer production. The final chapter examines a case study of the effect on price and quantity of law changes regarding vertical restraints in the beer industry. In May of 2004, Wisconsin enacted beer franchise laws which legally restricted when a brewer could terminate a contract with a beer wholesaler. Subsequently in January of 2006, Wisconsin mandated that brewers must assign each wholesaler to an exclusive wholesale territory. Using scanner data from a large number of chain grocery stores, I examine the impact of these laws on prices and quantities sold. The impacts differ depending on whether the brewery is a large, domestic brewery, import brewery, smaller craft brewery or located in-state. I find that craft beer prices increased by approximately 2.34-3.40% after franchise laws were implemented and increased 3.31-3.92% after exclusive territories were mandated. The latter effect was larger for craft brewers located within Wisconsin. These results are robust and consistent across several control groups. I do not find robust results, consistent across control groups, on sales quantities. Using surrounding states as a control group, which may better account for local shocks, finds overall beer quantity sold decreased. Results are consistent with the laws causing an increase in costs of distribution and reducing competition