Review of Industrial Organization 22: 1–25, 2003.
© 2003 Kluwer Academic Publishers. Printed in the Netherlands.
Advertising Bans, Monopoly, and Alcohol
Demand: Testing for Substitution Effects using
State Panel Data
JON P. NELSON
Department of Economics, Pennsylvania State University, University Park, PA 16802, U.S.A.
Abstract. Using a panel of 45 states for the period 1982–1997, 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 (or non-banned 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 negat-
ive. Higher minimum legal drinking age laws have negative effects on beverage and total alcohol
consumption. Bans of advertising do not reduce total alcohol consumption, which partly reﬂects
substitution effects. The study thus demonstrates the possible unintended consequences of restrictive
Key words: Advertising bans, alcohol demand, regulation, substitution.
JEL Classiﬁcations: K32, L81, M3.
In the United States, the distribution and sale of alcoholic beverages is regulated
by the individual states. The Twenty-First Amendment, passed in 1933, granted the
states broad legal authority over the importation and sale of alcohol. As a result,
the extent and nature of alcohol laws vary by state, and these differences repres-
ent a “natural experiment” with respect to the effects of regulation. Long-term
differences in state laws potentially affect both the organization of the alcoholic
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 in the
paper. Comments by two anonymous referees and the General Editor are gratefully acknowledged.
The usual caveats apply.