The Effect of Price Advertising on Prices: Evidence in the Wake of 44 Liquormart

In May 1996 the U.S. Supreme Court struck down Rhode Island’s ban on advertising prices of alcoholic beverages, making Rhode Island the subject of a natural experiment for measuring the impact of advertising on prices. Using Massachusetts prices as controls, we find that while advertising stores substantially cut prices of advertised products, prices of other products, at both advertising and non-advertising stores rise under the advertising regime. We investigate stores' pricing responses to rivals' price advertising and find that small, non-advertising stores raise their prices of products advertised by rivals beyond their baseline price increase, while larger, advertising stores raise by less their prices of rival-advertised products. We find no reductions in price dispersion across stores with the introduction of price advertising. However, those stores that choose to advertise do have lower averages prices both before and after the law change. Indirect information on quantities sold, based on Rhode Island Lottery ticket sales, indicate that newspaperadvertising stores draw a higher share of customers after they advertise than before. We are grateful to Mary Benner, Jerry Drummond, Tim Groseclose, and Hannah Waldfogel for help gathering data. Chris Dulude of the Rhode Island Lottery provided information on lottery sales. Seminar participants at Wharton and Yale provided helpful comments.