ADVERTISING BANS, MONOPOLY, AND ALCOHOL DEMAND: TESTING FOR SUBSTITUTION EFFECTS USING PANEL DATA* by

Using a panel of 45 states for the period 1982-97, this study analyzes the importance of several restrictive alcohol regulations, including advertising bans for billboards, bans of price advertising, state monopoly control of retail stores, and changes in the minimum legal drinking age. In contrast to previous research, the study allows for substitution among beverages as a response to a regulation that targets a specific beverage. A restrictive law that applies only to one beverage (or one form of advertising) can result in substitution toward other beverages (and other media). Allowing for substitution means that the net effect on total alcohol consumption is uncertain, and must be determined empirically. The empirical results demonstrate that monopoly control of spirits reduces consumption of that beverage, and increases consumption of wine. The effect on beer is positive, but is not statistically significant. The net effect on total alcohol is significantly negative. Higher minimum legal drinking age laws have negative effects on beverage and total alcohol consumption. Partial bans of advertising do not reduce total alcohol consumption, which in part reflects substitution effects. Results in the paper are applied to the Supreme Court’s Central Hudson test for First Amendment constitutionality of restrictions on commercial speech. JEL Codes: K32, L81, M3. _________________ * I wish to thank Doug Young for providing the ACCRA price data and for comments on an earlier draft, and Ed Coulson and Mark Roberts for helpful discussions on the empirical analysis. The usual caveats apply. Preliminary: For Review & Discussion