October 6, 2005

But we were trying to discourage student drinking.

Is that a defense in an antitrust suit?

UPDATE: For those of you wondering why this new case is different from the one you remember reading about before, which got dismissed a while back, here's more:
A Minneapolis law firm filed a lawsuit Tuesday accusing 25 bars near the University of Wisconsin-Madison campus and their trade association of conspiring to inflate drink prices from 1990 until last year. The class action lawsuit seeks relief for revelers it claims were ripped off....

A judge in April dismissed a similar lawsuit filed by the same firm, Lommen, Nelson, Cole & Stageberg, saying there was no conspiracy. That lawsuit accused bars of illegal price-fixing when they agreed in 2002 to voluntarily stop weekend drink specials to stave off a tougher ban on drink discounts the city was considering.

The lawsuit filed Tuesday in federal court reiterates claims that the voluntary ban on specials was meant to maximize bars' profits but alleges the violation of federal antitrust laws goes back even farther.

For 15 years, drinkers "were charged supra-competitive, excessive and fixed prices for alcohol" at the taverns, the lawsuit claims. Through private conversations and secret deals, the bars agreed when to increase prices and offer drink specials, it claims.

The conspiracy allegedly started after Wisconsin increased its drinking age from 18 to 21 in 1987. Despite reduced demand, drink prices increased faster than inflation in the 1990s "and the timing and sequence of those increases were agreed upon" by bar owners during monthly meetings of the Madison Tavern League, the lawsuit claims.
Do University officials attend Tavern League meetings?

Anyway, a class action ... maybe all you former students will one day recover for all the extra money you paid for drinks here a decade ago. How much will you get? Maybe you'll get a coupon for a free beer!

15 comments:

SippicanCottage said...
This comment has been removed by the author.
Mary said...

First reaction: wow, what a waste of court resources (if you know the backstory on this one.)

Bruce Hayden said...

It will be interesting. This is another case of political correctness running up against the law. You seem to have your fair share of those in Madison. Wonder why?

In any case, I would think that it would be harder getting away with raising drink prices, per se, versus eliminating drink specials.

Actually sitting around and setting drink prices would seem to be a classic per se (15 USC) Section 1 Sherman Act violation.

Let me add that I haven't done that much with antitrust law since law school, so a lot of my information is out of date. In particular, at that time, the "per se" rules were being loosened. I don't know how far that went. At one time, specifically setting drink prices would have been a per se violation. (But following a price leader often isn't).

Bruce Hayden said...

Mary,

But not everyone in Madison is under aged or liable to binge drink. What about law school faculty? Presumably, most, if not all, of them are legal.

As a consumer of alcohol, I really don't care that much whether some stupid college students overdrink and kill themselves. Survival of the Fittest, and all of that. Rather, I worry more about what I, myself, am going to pay for drinks.

So, is it legal for bar owners to sit around and set prices together in order to protect their college aged students if it is going to hurt their more mature customers financially?

Note - the above was tongue in cheek. I am not really that heartless.

peter hoh said...

I hate these class action suits in which the "victims" end up getting $1.72 each for the damages. All the pain and suffering inflicted upon them because they purchased slightly smaller video screens than were advertised, or whatever.

Not sure how to eliminate such abuses. Maybe cap the winning legal team's share to the size of the average award.

Pastor_Jeff said...

Did anyone else catch this?

Despite reduced demand, drink prices increased faster than inflation in the 1990s

That would be basic market economics, from the bar owners' perspective. If demand dwindles, I have to raise prices to generate the same revenue and profits (low volume, high margin). Not saying there wasn't collusion, but how can journalists not get stuff this basic?

Jake said...

"Maybe you'll get a coupon for a free beer!"

And the lawyers will get 14,000 sq ft mansions in Vail, Co.

Mary said...

And current students in these budget-strapped times end up paying more, somewhere, for the costs to the university defending itself in this case? (No opinion here re. the tavern owners' liability.)

ok I'm being a pessimist and just maybe need a drink here!

John R Henry said...

Pastor Jeff said:

That would be basic market economics, from the bar owners' perspective. If demand dwindles, I have to raise prices to generate the same revenue and profits (low volume, high margin).

Actually, that would NOT be basic economics. If demand dwindles and the bar owner raises prices, demand will dwindle more. This further reduced demand will lead, under your faulty logic, to further raising prices and demand dwindling still more.

Finally the bar will go out of business and the student drinking problem will be solved.

What actually needs to happen in the face of dwindling demand is to reduce prices to pump up sales. You'll generally make a LOT more money selling a large quantity at a small markup than vice-versa. See Walton, Ford, Rockefeller, Carnegie, Gates and others for examples.

John Henry

John R Henry said...

Just in case:

When I said the student drinking problem would be solved, I meant with respect to that one bar. Even if all bars close, students will continue to drink.

John Henry

Pastor_Jeff said...

John R Henry,

Yes, I understand what you're saying, but less demand and lower prices = out of business. The situation was one of decreased market demand, artificially created by external forces. Lowering prices is not likely in that case to increase sales.

This is a "cash cow" scenario. You milk the sector for all the profits you can as long as you can while looking for other ways to build business. See R J Reynolds.

Elliott said...

A relatively simple analyis might go like this:

The question of what would happen to prices is dependent on the structure of the market. In the case of reduced demand in a purely competitive market, prices would drop either explicitly or implicitly (more services for the same price) until the marginal businesses went out of business because they could not cover their overhead.

In the case where the suppliers have market power (likely in this case) because of some barrier to entry (such as a liquor license or location) then prices may or may not be reduced. It depends on whether the demand was inelastic or elastic. If elastic then prices would drop to spur higher revenues. If inelastic then prices would rise to increase revenues.

I suspect that drinking in a bar is a market where demand is inelastic. In that case, any collusion by bar owners would likely speed the increase in prices.

Chris said...

There are plenty of economic situations where demand can go down and prices go up.

As mentioned above, if demand is inelastic, and it goes down because of external (non-market) factors, then lowering the price will not always increase demand, and raising the price will not substantially decrease demand.

Now, given this, you have to realize that the cost of the alcohol is only a part of the cost of a drink in a bar, the cost of rent, electricity, music, cleaning, etc. all are factored in, and often make up more of the cost than the drink itself.

Now, if demand goes down because of external factors, and less people buy drinks, these non-drink costs are spread across fewer drinks, so it's easy to see how in certain situations when demand goes down, prices can rise.

Supply and demand only accounts for market factors, and also the supply/demand curve is not a straight line. So there may be price levels where a small increase in cost will not substantially decrease demand, but will increase profits enough to cover the lost demand because of the external market factor.

I don't think agreeing to stop certain marketing practices to avoid having a strict ban imposed on you is collusion, and just because prices rose is not evidence of price fixing.

Pastor_Jeff said...

Chris is on target. This is one of the reasons why portion sizes have increased dramatically in the restaurant business -- fixed costs far outweigh variable ones. One of the easiest way to increase revenue and profits is offering larger servings at higher prices because the marginal cost of food is so small. Increasing entree prices by even $1 at a marginal cost of $0.15 is a winner.

Chris Burkhardt said...

I was a student at Madison during the 90's, and as I remember the change was not really voluntary. Tons of bars were offering all you can drink beer for $5, and people were getting crazy, so the university basically said shut this down or were going to shut you down.

Doesn't someone who was affected by the actions need to file suit?
I don't understand the point of this lawsuit, and how it got started. Did the lawfirm dream this up to make money, and then go around finding people to join up? Was this started by some anti-drinking group to just hurt bar owners? By the university even, to drive the bar owners out of buisness and move bars further off campus?

Finally, if they win, how do I get my money? ^^