Essays on parametric and nonparametric estimation of market structure and\ud tax incidence in the U.S. brewing industry

Graduation date: 2009This dissertation addresses two main issues involving alcohol markets. In\ud the first, we employ both parametric and nonparametric methods to analyze the\ud market structure and estimate the degree of market power in the U.S. brewing\ud industry. In the nonparametric case, we use the variations in the excise tax to test\ud whether behavior is consistent with that of a monopolist. Then, we calculate the\ud “numbers equivalent,” defined as the number of firms in a Cournot model that are\ud consistent with market data. In the parametric case, we employ the new empirical\ud industrial organization (NEIO) technique to estimate the degree of market power.\ud This involves simultaneously estimating a market demand function with myopic\ud addiction and an industry supply relation.\ud The results show that firm behavior in the U.S. brewing industry is not\ud consistent with a cartel or a single monopolist. Both parametric and\ud nonparametric methods provide consistent results which indicate that the U.S.\ud brewing industry is quite competitive. Furthermore, we find that the degree of\ud market power increases as concentration increases.\ud Second, we investigate the relationship between beer taxes and prices. As\ud excessive alcohol consumption creates enormous negative externalities on\ud society, various policies have been implemented by federal, state, and local\ud governments to reduce alcohol use and its undesirable consequences. Because\ud consumption falls with an increase in price, using higher excise taxes to raise\ud prices is one policy that can be used. However, the effectiveness of such a policy\ud depends on two issues: (1) how sensitive alcohol consumption is to a change in\ud price, and (2) the degree to which prices respond to a change in taxes. In this\ud study, we focus on the second issue. We estimate a reduced-form equation of the\ud price of beer which is derived from a structural model developed in Chapter 2.\ud The results show that the federal tax on beer is over-shifted, while the state\ud tax is not fully passed through. These results imply that a policymaker interested\ud in reducing alcohol consumption should focus on raising the federal excise tax\ud rate rather than depending on an uncoordinated policy by individual states to raise\ud their state excise tax rates