Laws That Limit Online Shoppers

A look at wine sales over the Internet shows the price of some regulations in the name of consumer protection.

The New York Times, "Economic Scene" , July 17, 2003

Remember when getting a mortgage meant visiting a bank or a broker in person, when handcrafted jewelry was something you could buy only at a gallery, when finding out-of-print books meant combing used-book stores, when only New Yorkers could buy certain high-end cosmetics?

Internet commerce changed all that, breaking down many local monopolies and giving people in small towns access to the product variety formerly found only in the largest metropolitan areas. Now, anyone anywhere can buy just about any book, any music CD, any electronic product, and all the varied merchandise on e-Bay.

But, there are exceptions.

State regulations passed long before anyone conceived of electronic commerce block direct Internet sales in a number of industries, from contact lenses to automobiles. These laws were often passed in the name of consumer protection.

But do those benefits outweigh their negative effects on electronic commerce? The agency charged with protecting consumer welfare by ensuring competition -- the Federal Trade Commission -- wants to know.

In October 2002, the agency held a three-day workshop at which scholars and industry representatives looked at barriers to e-commerce in 12 varied fields, from pharmaceutical sales to legal services. (Transcripts are available here.)

Now F.T.C. staff economists have taken a detailed look at a single industry: online wine sales.

Like books or music, wine is something you can buy online simply by knowing the name of the product; you don't have to try it on. And wine comes in more varieties than a local retailer can handle.

There are more than 2,000 wineries today, compared with 500 to 800 in 1975, the F.T.C. report said, and "many of these new wineries produce relatively small amounts of wine, often less than 2,000 cases annually, whereas large wineries can produce over 300,000 cases annually."

Titled "Possible Anticompetitive Barriers to E-Commerce: Wine," the report considers two questions: Are state shipping bans necessary to prevent sales to minors? And how do the bans affect the prices and variety available to consumers? (The report can be downloaded here.)

Twenty-six states prohibit almost all direct shipping of out-of-state wines, including seven that make direct sales a felony. Consumers in these states can buy directly from winemakers only if they actually visit the winery.

Even states that allow direct shipping usually impose restrictions. Most limit the amount of wine a consumer can receive. Minnesota prohibits all Internet sales, while Montana requires consumers to get a $50 "connoisseur's permit" before they can receive out-of-state shipments.

These regulations, too, stifle online competition. "Some package delivery companies will not deliver wine to Montana, because they do not want to try to verify whether a Montana customer has a connoisseur's permit," the report said. "They will not deliver to Connecticut for the same reason. According to the Wine Institute, package delivery companies also will not deliver to Massachusetts, partially because Massachusetts requires each individual delivery truck to get a license to deliver alcohol, and will not give a license to an entire fleet of trucks."

Supporters argue that the bans are needed to block sales to minors. So F.T.C. researchers surveyed state enforcement agencies, asking whether they had complaints of online sales to minors. The answer was generally no.

Teenagers who want to drink rarely order cases of relatively expensive wine, paying by credit card. They have easier, cheaper, faster ways to obtain alcohol. States that do not ban direct shipping have found less restrictive ways to enforce drinking-age laws, like requiring an adult signature on delivery.

Bans on direct shipments do, however, hurt adult wine drinkers, raising prices and limiting choice -- even in highly competitive retail markets.

Jerry Ellig, an economist who is deputy director of the F.T.C.'s office of policy planning, and Alan E. Wiseman, a political scientist at Ohio State University, compared prices and variety in stores with the wine available online. (Their paper is included as an appendix to the F.T.C. report.)

Their methodology gave bans the benefit of the doubt. They did not consider obscure vintages, surveying only the wines listed as the most popular among restaurant patrons by Wine and Spirits magazine. For their bricks-and-mortar survey, they used stores within 10 miles of McLean, Va., an affluent Washington suburb where wine is widely available.

At the time Virginia had a ban on direct shipments of wine, but the state allowed retail sales some other states outlaw. In Northern Virginia, Mr. Ellig said, "we have specialty shops, we have beverage megastores, we have groceries that are allowed to sell wine." If the traditional system works for consumers anywhere, it should work in these suburbs.

Yet for wines that cost more than $20 a bottle, online buyers could save $4.40 to $7.19 a bottle, depending on the shipping method and quantity ordered. The more expensive the wine, the greater the savings.

More surprising was the difference in availability. Even among the 83 popular wines surveyed, 15 percent were not available at any local store. "I would have thought retail outlets would have stocked all popular wines," Asheesh Agarwal, an F.T.C. economist, said in an interview.

If state bans hurt consumers who want popular wines, they are even more damaging to "the consumer who very strongly wants some particular wine from some particular winery who can't find it locally," Mr. Ellig said.

Why, then, do the bans persist? The answer is interest-group politicking. Local businesses, whether they sell wine, cars or insurance, are keeping out the competition.

At the workshop last October, "everybody had a claim as to why they were different and e-commerce was fine for everybody else that we were looking at," Mr. Ellig said. "Nobody attempted to defend the regulations as a whole in all these industries. It was almost comical."