Wednesday, 15 August 2018

Why you might want alcohol sellers to be monopolies

In most parts of New Zealand, alcohol is sold by several firms in competition with each other. In West Auckland, that isn't the case. West Auckland has two legislated monopolies, the Portage and Waitakere Licensing Trusts, that are holdovers from 1960s legislation when alcohol monopolies were more common. Last week, the New Zealand Herald reported on a new petition to open West Auckland up to competition in alcohol sales:
A group of West Aucklanders have launched an online petition to challenge the alcohol monopoly that prevents local residents buying wine or beer at supermarkets.
West Auckland Licensing Trust Action Group (WALTAG) spokesman Nick Smale said the Portage and Waitakere Licensing Trusts had held a monopoly over hotels, taverns and bottle stores in West Auckland since the 1970s. Residents were missing out due to the lack of competition in the area...
Smale said it had been 15 years since residents last voted, and he believed a referendum was needed ahead of the next local body elections.
"We need 15 per cent of voters in the Portage and Waitakere Licensing Trusts areas to sign the petition – that's about 28,000 people. If we can achieve this it will force a referendum and allow West Aucklanders to have their say."
What effects would opening the alcohol market in West Auckland have? Consider the market diagram below, which makes the simplifying assumption (as I do in my ECONS101 and ECONS102 classes) that the monopoly seller is a constant cost firm (so the marginal cost curve is a horizontal line). The monopoly will operate at the profit-maximising quantity (where marginal revenue (MR) is equal to marginal cost (MC)), which is QM. To sell that profit-maximising quantity they will set a price of PM (because at the price PM consumers will demand exactly QM units of the product).

With that price and quantity, the consumer surplus (the difference between the amount that consumers are willing to pay (shown by the demand curve), and the amount they actually pay (the price)) is the triangle area ABF. The producer surplus (the difference between the amount the monopoly producer receives (the price), and their costs (which are shown by the marginal cost curve)) is the rectangle area FBDG. Total welfare is the combination of consumer and producer surplus, i.e. the area ABDG.

Now consider what would happen if this market was opened to competition. Let's assume it becomes a perfectly competitive market, in which case the marginal cost curve becomes the supply curve (S), and the market will operate at the equilibrium point (where supply meets demand).  The perfectly competitive market would operate at the quantity QC and price PC. Consumer surplus would be the triangle AEG, while producer surplus would be zero (because the price PC is equal to the cost of every unit produced), so total welfare is also the triangle AEG.

Ok, so what changes between these two situations (monopoly and perfect competition)? Consumer surplus is higher with more competition (AEG, compared with ABF), which is no doubt why alcohol consumers (such as Nick Smale's group) are in favour of greater competition. Producer surplus is lower (in fact it falls to zero in this model), which is why the Trusts are against the petition. No surprises there. Total welfare (a measure of economic welfare for society) is higher with greater competition (AEG, compared with ABDG).

However, that isn't the end of the story. Total welfare only shows the impacts on economic welfare in this market. With more competition, the price of alcohol is lower (PC, rather than PM), and the quantity of alcohol sold and consumed increases (from QM to QC). Greater alcohol consumption is associated with greater levels of alcohol-related harm. As the article notes:
According to the Auckland Regional Public Health Service, West Auckland has the lowest incidence of alcohol-related crashes in Auckland Council urban zone areas, the trusts' website said. Drink-driving prosecutions were also lower in the region compared to others.
It also quoted University of Otago's Health Promotion and Policy Research Unit's Tim Chambers as saying: "The sale of alcohol through retail stores controlled by a licensing trust, is an effective model for preventing childhood exposure to alcohol marketing."
So, if your goal is to minimise alcohol-related harm, you might want the alcohol monopolies in West Auckland to remain. Overall, it's ambiguous whether the proposal is to eliminate the alcohol monopolies is good or not, since there are gains in economic welfare, but probably offsetting losses in terms of alcohol-related harm.


  1. so there's no dead weight loss for monopolies when competition exist?

  2. If there is perfect competition, then there is no monopoly any more (because there are many sellers, rather than just one). The many sellers will compete on price, driving the price down, and eliminating the deadweight loss.