Monday, October 8, 2007

Wisconsin, Beer and Price Fixing

Wisconsin and beer - Miller, Schlitz, and Pabst. You can even get blitzed by Blatz. Madison and the University of Wisconsin work together as one of the nation’s great universities, college towns, and party schools. To be truthful, Wisconsin should not be ranked with such institutions as Arizona State, Chico State, Colorado, Colorado State, Florida, LSU, Maryland, Ole Miss, Penn State, Texas, UCSB, and ZooMass. Wisconsin is professional; all others are but mere amateurs in comparison. Beer is one of the four basic food groups and a rite of passage in Madison.

Justifiably concerned about rising alcohol driven crimes, binge drinking, and a poor image, both the University and Madison decided to act. Authorities threatened to take action against bars, but did not formally do so. However, about half the bars near the campus announced in September 2002 that they would voluntarily abandon drink specials, 2 for 1 beers and discounted liquor, on Friday and Saturday night after 8:00pm.

Assuming that these steps did not substantially reduce the amount of drinking, then the effect on the students is to raise the cost of drinking, and, not so coincidentally, the profits of the bar owners. A study sponsored by the University showed that serious alcohol-related crime continued to rise despite these actions.

The student response was to file a suit alleging price-fixing by the bars. I do not profess to predict how the Wisconsin Supreme Court will decide the antitrust issue under Wisconsin law. Both the trial court and the Wisconsin Court of Appeals upheld the agreement as a valid pursuit of social good. The Wisconsin Supreme Court heard oral arguments last week on the appeal.

Under federal antitrust law, price fixing is unlawful per se. Arguments of pursuing the public or social good will not justify price fixing. Unlawful price-fixing extends not only to an actual price, but also to the terms and conditions of sales. Thus, an agreement to limit sales or advertising discounts constitutes price-fixing. Similarly, the elimination of Happy Hours and discounted drinks is a form of price fixing.

Let us start with a premise. Business is not altruistic. Charity and good will are commendable, but business survives by making money. Even professional bodies, such as architects, engineers and lawyers, have attempted to mask price fixing by asserting a greater public good.

The NCAA has twice run afoul of the antitrust laws and price fixing, first in attempting to limit the TV appearances of college football teams ( originally referred to as the Notre Dame Rule), and secondly to limit the compensation of some assistant coaches. Both were justified as promoting competition, but neither was relevant to rules affecting play on the field.

The key is simple, once everything is said and done, are consumers paying more for the same product? Understandably, no single bar would want to unilaterally raise prices with literally scores of competing bars in a small area. Only an agreement between competitors explains them raising prices simultaneously.

The legal problem is that the bar owners did not act pursuant to a statute, ordinance, or regulatory edict. In other words, they cannot plead that state action compelled their actions. That is a wonderful defense under federal antitrust law.

If the government wishes to restrict drinking, then it can ban drinking, restrict it, limit the sales, or outlaw practices. For example, Massachusetts banned Happy Hours when I lived in the state. Certainly the Wisconsin Legislature is not going to ban the sale of alcohol. We tried that to miserable effect; it was called Prohibition. Nor would the State wish to forfeit the excise taxes from alcohol sales. Realistically, the Wisconsin legislators would find a very unfriendly reception in the Madison bars (the same bars convenient to the Wisconsin students) near the legislature if they enacted restrictions. The Madison City Council also failed to enact an ordinance that would restrict Happy Hours and the equivalent. Similarly, the state regulatory agency could impose restrictions, but didn’t.

The barkeepers were foolish enough to do it unilaterally, but collectively. The true beneficiaries are the lawyers.

On Wisconsin!

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