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In response to President Joe Biden’s July executive order, the Treasury Department released a report last week examining competition in alcohol markets. This tax collecting agency plays an important and often overlooked role enforcing fair competition rules in alcohol markets through its Alcohol and Tobacco Tax and Trade Bureau (TTB).

The report covers some of the ways monopolistic alcohol manufacturers, distributors, and retailers abuse their market power to stifle competitors, but it also highlights some of the industry’s competitive successes. Speaking about the report at an Open Markets Institute conference Wednesday, Tim Wu, special assistant to the President on technology and competition policy, said that “while [alcohol markets] are not perfect, they do give us a sign of how the U.S. economy can be. For example, beer brewing has gone from an industry which consolidated all the way down to 89 breweries in the United States, where there’s now over 6,000 breweries operating in the U.S., and they are regional, they’re competitive, they’re innovative.” Wu said this is in part because alcohol markets are highly regulated and ban things like vertical integration and exclusionary tactics.

Yet Treasury’s report both endorses and criticizes some of the very market regulations that Wu praised. In one breath, it recommends stronger merger enforcement and crackdowns on exclusive dealing. In the next, it elevates deregulatory arguments from more laissez-faire antitrust practitioners and recommends that states scrutinize bans on vertical integration, “post and hold” laws, and other market regulations.

“The report identifies horizontal competition issues within non-retail tiers of the industry but does not address anti-competitive policies advanced under the guise of supporting small suppliers,” said John Bodnovich, executive director of the American Beverage Licensees, which represents alcohol retailers. “These efforts function as trapdoors to industry deregulation and threaten the vertical integrity of beverage alcohol markets.”

In a market for something like alcohol, competing on rock bottom prices isn’t necessarily an optimal goal. The report acknowledges that alcohol regulations need to factor in public health goals in addition to consumer benefits and fair competition. Lawmakers restructured alcohol markets in the wake of Prohibition to give states more control over alcohol sales and prevent corporate behemoths from profiting off copious cheap alcohol at the public’s expense. Many states implemented what’s called the three-tier system, or a ban on vertical integration between alcohol production, distribution, and sales, in order to avoid “tied houses” in which alcohol-makers push cheap booze in bars they owned. Another 20-some states have “post and hold” laws that require alcohol distributors to publicly “post” their prices and “hold” them constant for a period of time. States also have “franchise laws” that regulate contract terms between alcohol sellers and distributors. These laws vary by state, but most prohibit sudden contract cancellations and others ban exclusivity requirements under the presumption that larger alcohol-makers have bargaining power to demand that distributors not carry their rivals. 

The three-tier system has the benefit of preventing monopolists, be they powerful manufacturers, distributors, or retailers, from controlling the entire alcohol supply chain and cutting off market access to competitors. Franchise laws create additional barriers against exclusive dealing and other coercive arrangements. Post-and-hold laws can also level the competitive playing field for small alcohol retailers who get the same prices as bigger buyers.

While big alcohol-makers still find ways to lock up increasingly consolidated distribution and exclude new entrants, as the report covers, craft breweries, wineries, and distilleries have been able to proliferate in recent decades under the three-tier system. High degrees of state control, meanwhile, provide close public oversight of alcohol sales to accommodate local preferences.

But not everyone supports these laws. Former antitrust practitioners at the Federal Trade Commission (FTC), such as Sen. Ted Cruz and George Mason law professor Josh Wright, have critiqued state-level alcohol regulations, including the three-tier system and post-and-hold laws, arguing they raise alcohol prices. In comments to the TTB, some craft producers also said that “good cause” termination requirements in franchise laws can lessen competition for distribution by trapping them in undesirable agreements. Commenters also criticized three-tier laws for banning direct shipping to customers. For instance, most states have passed three-tier carveouts for wineries to ship directly to consumers, and in 2018 smaller wineries bottling fewer than 50,000 cases annually made up the largest segment of direct wine shipping with 46% of sales.

The report elevates these critiques and recommends that states reevaluate the three-tier system, post-and-hold laws, and franchise laws among other regulations. The Brewers Association, which represents craft brewers, welcomed these suggestions. “We are glad to see that the report recognizes that some laws, even those originally designed for a pro-competitive purpose, have inhibited the growth and competitiveness of craft producers,” Bob Pease, president of the Brewers Association, said in a statement about the report. Pease highlighted direct-to-consumer access and changes to franchise laws as things that would “improve the ability of small firms to enter and effectively compete in beverage alcohol markets.” 

On the other hand, Paul Pisano, senior vice president of the National Beer Wholesalers Association, thinks that the report’s critiques of state laws are “irrelevant and unsupported.” Jim Koch, the chief executive officer of Boston Beer, added on an earnings call Wednesday that the report “did not give, to me, appropriate weight to the beneficial effects of a three-tier system … if we had the system we have in many, many other countries, where the brewer owns the wholesaler — and sometimes even the retailer — there probably would not have been craft beer.” Koch also said it wasn’t “appropriate” for the federal government to weigh in on state regulations such as franchise laws.

In focusing on the potential benefits to craft producers, Treasury’s report does not acknowledge the risks of dominant players abusing state-level deregulation. For instance, large retailers are also interested in direct alcohol shipping. Amazon used to run a website connecting online shoppers with mail order wineries, charging wineries a 15% marketing fee to participate. The e-commerce and grocery goliath has also tried to get around bans on shipping alcohol from warehouses. If the plights of Amazon’s third-party sellers are any indication, craft producers could face a major squeeze should Amazon or another dominant retailer take over direct shipping. Public health officials also worry that direct delivery would make it easier for minors to buy alcohol.

The report rightly raises concerns about horizontal consolidation in beer brewing, stating that just two companies, ABInBev and MolsonCoors, commanded nearly 65% of all beer revenues in 2021. It also highlights how consolidated manufacturers and distributors can use exclusive contracts to keep out competitors. But its assessment of franchise laws makes no mention of how many ban these very practices and exist to curb consolidated brewer influence.

Additionally, the report critiques post-and-hold laws even though they have little to do with market access for craft producers. Instead, the report focuses on how they raise alcohol prices and overlooks the benefits of posted prices for small retailers.

Despite these deregulatory leanings, the report includes many other recommendations that would strengthen antitrust enforcement, starting with better trade practice regulation at the TTB. The TTB has lesser-known authority to enforce the Federal Alcohol Administration Act, which bans exclusive dealing, commercial bribery, and other unfair trade practices in alcohol markets. But court decisions since the 1990s have made it more challenging for the TTB to bring claims, the report argues. For instance, manufacturers can get away with commercial bribery in the form of pay-to-play or “slotting” fees for prime shelf space, so long as they aren’t deemed exclusionary. Alcohol brands and distributors also offer shelf restocking services as “category captains,” which lets big brands influence what goes on stores’ shelves, yet the report says the practice often goes unchecked. TTB can also only target alcohol manufacturers and distributors for these violations. In a market where retailers increasingly hold the power and initiate pay-to- play schemes, unfair deals can go unregulated.

The report suggests that the TTB consider issuing new rules to update its trade practice regulations and strengthen bans on category captains, slotting fees, and exclusive deals. It also urges the TTB to take on complex cases and focus enforcement efforts on the largest offenders with the most market power. In the past some alcohol industry experts have argued that TTB’s trade practices enforcement disproportionately targeted small players.

Additionally, the report encourages federal antitrust enforcers to scrutinize further consolidation among alcohol-makers and distributors, especially takeovers of craft brewers by major beer corporations, and review the harms of past mergers. It also urges the agencies to be skeptical of efficiency claims and change merger guidelines to take a closer look at deals in highly concentrated markets.

Increased scrutiny is needed as major packaged goods and soda companies move into the alcohol sector. Energy drink-maker Monster Beverage is reportedly in talks to merge with the third-largest beer corporation and Svedka maker, Constellation Brands. Constellation also has a nearly 40% stake in the Canadian cannabis company Canopy, priming a combined Monster-Constellation to corner markets on all types of mind-altering beverages. This news comes after Pepsi announced plans to enter the alcohol distribution business through a partnership with Boston Beer, which will create an alcoholic Mountain Dew drink on Pepsi’s behalf. With Pepsi’s history of using slotting fees and category captain arrangements to exclude competitors, TTB’s enforcement in this arena will be even more important.