For Release:
July 3, 2003
FTC: E-commerce Lowers
Prices, Increases Choices in Wine Market
Empirical Analysis Finds that
Direct Shipping Improves Consumer Welfare;
States Have Less-Restrictive Means of Limiting Sales to Minors
than an Outright Ban
A Federal Trade Commission staff report
released today concludes that e-commerce offers consumers
lower prices and more choices in the wine market, and that
states could expand e-commerce by permitting direct shipping
of wine to consumers. The empirical study finds that state
bans on direct shipping prevent consumers from saving as much
as 21 percent on some wines and from conveniently purchasing
many popular wines from suppliers around the country. FTC
Chairman Timothy J. Muris stated, “E-commerce can offer
consumers lower prices, greater choices, and increased convenience.
In wine and other markets, however, anticompetitive barriers
to e-commerce are depriving consumers of those benefits.”
In addition to its findings regarding competition,
the report concludes that states can limit sales to minors
through less-restrictive means than an outright ban on direct
shipping. According to officials from a dozen states that
allow direct shipping, these states typically require that
a supplier verify the recipient’s age and obtain an
adult signature before delivering the wine. Many states also
require that a supplier obtain a permit to ship wine to consumers
within the state. Of the states that have adopted such less-restrictive
safeguards, most report few or no problems with direct shipments
to minors.
“This report continues a long
FTC tradition of using empirical evidence to analyze policy,”
said Todd Zywicki, the Director of the FTC’s Office
of Policy Planning. “Before reaching any conclusions,
we conducted an economic study and talked to officials in
many states that deal with the issue on a daily basis. As
a result, we think that policymakers can have great confidence
in our findings.” Zywicki further noted, “Ours
is a very comprehensive analysis of the direct shipping issue.
We gathered empirical evidence on both the competition and
consumer protection aspects: the effects of direct shipping
laws on prices and variety, and the states’ experiences
with direct shipping and underage drinking.”
Key Findings
The report outlines several key findings:
- Consumers can purchase many wines online
that are not available in nearby brick-and-mortar stores.
An empirical study of the wine market in McLean, Virginia
found that 15 percent of a sample of popular wines available
online were not available from retail wine stores within
10 miles of McLean. In addition, by banning interstate direct
shipments, states limit consumers’ access to thousands
of labels from smaller wineries.
- Depending on the wine’s price,
the quantity purchased, and the method of delivery, consumers
can save money by purchasing wine online. Because shipping
costs do not vary with the wine’s price, consumers
experience the greatest savings on expensive wines, while
brick-and-mortar stores may offer better prices on less
expensive wines. The McLean study suggests that, if consumers
use the least expensive shipping method, they could save
an average of 8-13 percent on wines costing more than $20
per bottle, and an average of 20-21 percent on wines costing
more than $40 per bottle.
- State bans on interstate direct shipping
represent the single largest regulatory barrier to expanded
e-commerce in wine. More than half the states prohibit or
severely restrict out-of-state suppliers from shipping wine
directly to consumers. Many of these same states, however,
allow intrastate direct shipping, such as from in-state
wineries and retailers.
- Many other regulations impede e-commerce
in wine. These include prohibitions on online orders, very
low ceilings on annual purchases, bans on advertising from
out-of-state suppliers, requirements that individual consumers
purchase “connoisseurs’ permits,” and
requirements that delivery companies obtain a special individual
license for every vehicle used to deliver wine.
- Citizens are concerned about the direct
shipment of wine to minors. Some states have chosen to address
this concern in part by banning direct shipment of wine
to all consumers, or banning direct shipment from out-of-state
sellers. Others have opted for alternatives that are less-restrictive
than an outright ban.
- The states that permit interstate direct
shipping generally report few or no problems with shipments
to minors. Some states have applied safeguards to online
sales similar to those applied to brick-and-mortar retailers,
such as requirements that package delivery companies obtain
an adult signature at the time of delivery. Some states
also have developed penalty and enforcement systems to provide
incentives for both out-of-state suppliers and package delivery
companies to comply with the law.
- Several states that allow interstate
direct shipping also collect taxes from those shipments.
By requiring out-of-state suppliers to obtain permits, states
such as New Hampshire have sought to achieve voluntary compliance
with their tax laws. Most of these states report few, if
any, problems with tax collection. Other states with reciprocity
agreements forgo taxing interstate direct shipments altogether.
The FTC’s E-Commerce Initiative
This report continues the FTC’s efforts
to promote competition over the Internet. In August 2001,
Chairman Muris convened the Internet Task Force to evaluate
government regulations and business practices that could impede
online competition. The Task Force found that many state regulations
favor local suppliers over out-of-state competitors, and that
others ban online competition for particular goods and services
altogether. In October 2002, the Task Force organized a workshop
to study possible anticompetitive barriers to e-commerce in
ten industries, including wine. At the workshop, Commission
staff heard testimony from all sides of the issue, including
online suppliers, brick-and-mortar companies, consumer groups,
state officials, and academics.
Besides examining state regulatory barriers
to e-commerce at the workshop, FTC staff has encouraged pro-competitive
state regulation in other ways. For example, in Connecticut,
FTC staff filed comments with the state’s Board of Examiners
for Opticians that argued against regulations that would have
made it harder for online vendors to sell contact lenses to
consumers. In Oklahoma, FTC staff filed an amicus brief opposing
barriers to online sales of caskets. Similarly, in North Carolina,
Georgia, and Rhode Island, FTC staff filed joint comments
with the Department of Justice to discourage those states
from adopting rules that would have made it harder for non-lawyers
to perform real estate closings. These regulations would have
raised barriers to providing services online.
This report builds on those efforts. Many
states, some in response to court decisions, are re-examining
their rules regarding direct shipment of wine. The FTC already
has received requests from two states to comment on bills
that would affect the direct shipping of wine. In the past
year, many other states, including Virginia, Texas, New York,
and South Carolina, considered direct shipping bills. Moreover,
last fall Congress held a hearing that focused on the e-commerce
issues facing several industries, including wine. Finally,
the FTC’s staff received more public comments and complaints
about e-commerce barriers in wine than in any other industry.
The Importance of Empirical Data
“Policymakers had little actual
evidence to assess the impact of online wine sales on prices
and variety. The study of wine sales in McLean, Virginia is
the first empirical study assessing how state direct shipment
bans affect consumers,” said Jerry Ellig, Deputy Director
of the FTC’s Office of Policy Planning. Ellig and Alan
Wiseman, a former FTC economist, co-authored the McLean study.
Similarly, Zywicki noted that the report
contains empirical evidence about the effects of direct shipping
on underage drinking. “It’s very hard to gather
data about direct shipping and underage drinking. You obviously
can’t rely on minors to self-report if they’re
buying wine illegally. As a result, we gathered evidence from
the next best source – the state officials that actually
deal with direct shipping on a daily basis.” According
to the report, of the states that allow direct shipping and
have procedural safeguards against shipments to minors, most
report few or no problems with direct shipments. For example,
Illinois officials noted that the state’s liquor commission
“has received no reports regarding minors obtaining
wine from out-of-state shippers.” Nebraska officials
stated, “We have also not received any complaints or
alleged violations. Therefore, at this time, it does not appear
to be a serious problem.” Some states, such as New Hampshire,
concluded that minors are more likely to buy alcohol from
local retailers because the high cost of shipping and the
fact that the minor has to wait for the wine to arrive makes
purchasing wine at local retail outlets more desirable.
Chairman Muris expressed a hope that state
policymakers could use this information to formulate effective
policy. “The report provides a resource for the states.
Our staff found that the states that allow direct shipping
generally report few or no problems with shipments to minors.
Many of these states require package delivery companies to
obtain an adult signature at the point of delivery. We also
found no evidence suggesting that direct shipping increases
underage drinking beyond the levels attributable to sales
by brick-and-mortar stores. The primary consumer benefit
of e-commerce in wine – access to lower cost sources
of high-end, expensive wines – appears unlikely to be
important to most underage drinkers. Unfortunately, the evidence
shows that adolescents currently can obtain alcohol without
going to the trouble and expense of ordering it over the Internet.”
FTC officials outlined several steps that
states could take to control underage access to alcohol from
direct shipping. “If states choose to allow direct shipping,
we would encourage them to adopt stringent requirements, similar
to those that apply to brick-and-mortar retailers, with respect
to verifying a customer’s age,” said Zywicki.
“For example, states can require an adult signature
at the point of delivery, labeling of any package containing
alcohol, and penalty and enforcement systems to provide incentives
for both out-of-state suppliers and package delivery companies
to comply with the law,” he continued. “Many states
have also found it useful to require out-of-state suppliers
to obtain permits.”
Implications of the Report
The report does not purport to address
all aspects of online alcohol sales, or even all aspects of
the direct shipping issue. For example, the report explicitly
states that the FTC staff takes no position on the constitutional
issues involving direct shipping, and the staff could not
locate data on the effectiveness of adult signature requirements.
Moreover, FTC officials stated that they have not examined
the issues of online sales of other types of alcohol, such
as beer or liquor, and they have not focused on international
direct shipments of wine. The report also does not focus on
the merits of the tax debate, other than to note that states
attempting to collect taxes generally report few or no problems
with collecting them.
Nevertheless, FTC officials stated that
the report has implications for other industries. Chairman
Muris said, “We currently are examining many other industries
in which anticompetitive barriers to e-commerce may raise
prices and limit choices. Our findings in the wine industry
suggest that anticompetitive state regulations may significantly
harm consumers in many of these industries.”
The Commission vote authorizing the staff
to release the report was 5-0.
NOTE: The findings expressed
in the report are those of the staff of the FTC’s Office
of Policy Planning, Bureau of Consumer Protection, and Bureau
of Competition and do not necessarily represent those of the
Commission or any individual Commissioner.
Copies
of the report are available from the FTC’s Web site
at http://www.ftc.gov
and also from the FTC’s Consumer Response Center, Room
130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.
The FTC’s Bureau of Competition seeks to prevent business
practices that restrain competition. The Bureau carries out
its mission by investigating alleged law violations and, when
appropriate, recommending that the Commission take formal
enforcement action. To notify the Bureau concerning particular
business practices, call or write the Office of Policy and
Evaluation, Room 394, Bureau of Competition, Federal Trade
Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580,
Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300.
For more information on the laws that the Commission enforces,
the FTC has published “Promoting Competition, Protecting
Consumers: A Plain English Guide to Antitrust Laws,”
which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.
MEDIA CONTACT:
Mitchell J. Katz
Office of Public Affairs
202-326-2161
STAFF CONTACT:
Asheesh Agarwal
Office of Policy Planning
202-326-3558
(http://www.ftc.gov/opa/2003/07/wine.htm)
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Related
Documents:
Possible
Anticompetitive Barriers to E-Commerce: Wine
A Report from the Staff
of the Federal Trade Commission
(JULY 2003) [PDF 3.2MB]
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