A Vintage Experiences Special:

Complete Report by The Federal Trade Commission Released 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:

Jerry Ellig, Deputy Director
Office of Policy Planning
202-326-3528

(http://www.ftc.gov/opa/2003/07/wine.htm)