Introduction

Archaic and unnecessary Prohibition-era laws deny Maryland consumers access to their favorite California merlots, prevent Floridians from ordering bottles of wine over the Internet, and could send Nashville restaurateurs to jail for ordering Washington wineries' products. In recent years, such restrictive laws -- encouraged by politically powerful wine and liquor wholesalers who see the rise of e-commerce as a threat to their comfortable place in the market -- have proliferated at the expense of consumers, producers, retailers, and market efficiency. These wholesalers' actions are emblematic of a much larger problem -- "the revenge of the disintermediated" -- whereby middlemen in industries ranging from autos to travel services use laws, regulations, or other restrictions to thwart more robust e-commerce competitors. This report is a case study of middleman resistance in the alcohol industry, but has broader implications for e-commerce as a whole.

Distributors and retailers in most consumer goods industries face competition from new distribution channels, including big box specialty stores, large discount chains, direct shipping from manufacturer to retailer and, of course, e-commerce. But in the alcoholic beverage industry, as alternative channels emerged in the last decade, alcohol wholesalers, and in some cases retailers, have pushed for legal protections. Today, no state allows unlimited direct shipments from manufacturers to retailers or consumers. Twenty-six states require alcohol shipments to come to rest at a licensed wholesaler's warehouse while in transit from producer to retailer. Eighteen states exercise monopoly control over wholesaling within their borders. Fourteen states have " franchise laws " that legally grant wholesalers regional monopolies. Some states prohibit retailers from owning more than one store. More than 30 states prohibit citizens from purchasing beer, wine, and liquor over the Internet, with at least eight of those prohibitions being passed since 1995. While originally intended to advance the public interest, the regulatory and legal framework now governing the alcohol industry lowers productivity, raises costs, restricts consumer choice, and limits small producers' access to markets. Even the 18 states that conduct wholesaling activity themselves restrict the ability of producers to ship directly to retailers and restrict choice in the market. There are better ways to temper the public's appetite for alcohol than by preserving outmoded vestiges of the pre-information economy.

Alcohol wholesalers argue that these legal restrictions serve key public purposes: preventing underage drinking, collecting state excise taxes, and curbing illegal trafficking. These purposes are certainly appropriate public policy goals, and it is not the aim of this paper to either encourage or discourage alcohol consumption. The specific public policy goals that wholesalers affect may also be accomplished through other, less restrictive means without causing inefficiency, decreased choice, and other market problems. Similarly, this paper does not contend that wholesalers serve no useful purpose; wholesalers exist with no legal mandate in almost every other retail industry and almost certainly would remain in the alcohol market, albeit likely with a smaller market share, if protective mandates were lifted. Therefore, it is time to bring the regulation of the alcohol industry into the 21st century by ending the legal protections for middlemen. To do this:

• Congress should clarify the respective state and federal powers controlling commerce in alcohol, namely that states cannot prohibit open competition any more than is necessary to regulate for temperance and taxation purposes.
• States should abolish mandates that legally require a wholesaling tier and other statutes that unnecessarily restrict the market, so that consumers and producers may benefit from greater choice, competition, and market access.
• The federal government should help states and industry streamline compliance procedures for the various registration and licensing requirements mandated by individual states.