Collegiate Times

As Gov. Bob McDonnell works to garner support for his plan to privatize liquor sales in Virginia, students are anticipating the increased availability of liquor, along with the lower prices that theoretically accompany stronger competition in the market. However, as some experts have noted here in Blacksburg, the small number of stores that will begin selling liquor increases likelihood of collusion and price-fixing.

This problem makes sense, and economic rationale largely supports the claim: In a market with only three firms in an area, managers can collude more easily and quickly detect “cheating,” where one of the three lowers its prices to gain market share. Moreover, in these markets, firms have fewer incentives to reduce prices than more populated ones, since each is already capturing a significant level of market share. Since most businesses operate in a world of repeated interactions, they will be hesitant to risk hefty profits and trust among firms for a short-term increase in profits.

Because of these problems, should McDonnell succeed in his efforts, Blacksburg residents may see no benefits of privatization in terms of alcohol prices. McDonnell may be trying to slim down the scope of government, but privatization could create a need for regulatory oversight to protect consumers from price gouging. Whether this would eat away at the presumed savings of privatization, however, depends on several factors, and will require more advanced studies.

The preliminary responsibility of our leaders in Richmond is to account for threats to consumers posed by oligopolies engaging in predatory pricing. If this were the case, any possible savings to citizens from lowering the need for taxes to balance the budget would be offset by the higher prices in a massive market.

the editorial board is composed of scott masselli, gabi seltzer and peter velz

A version of this article appeared in the Dec 8 issue of the Collegiate Times.