It’s the economy, stupid – why minimum pricing won’t work

There was a reminder last week that politics produces strange bed-fellows when the Institute of Alcohol Studies (formerly known as the UK Temperance Alliance) promoted the pub industry’s view of alcohol policy.

Pubs have traditionally been the temperance lobby’s greatest foe. The American prohibition movement was not spearheaded by the Anti-Alcohol League or the Anti-Drunkenness League but by the Anti-Saloon League. Concerns about people drinking at home are a more recent, British phenomenon. For decades, the temperance lobby preferred people to be drinking at home than in bars, but years of excessive regulation and high taxes have led to thousands of pub closures and they are no longer seen as such a threat. People are now buying most of their drink in the off-trade and so, like Willie Sutton who robbed banks because ‘that’s where the money is’, the temperance lobby targets the off-trade because that’s where the drink is.

In a classic example of Bootleggers and Baptists behaviour, the hospitality industry has found common cause with anti-alcohol campaigners in going after supermarkets. The survey found that most publicans want higher taxes on alcohol in supermarkets and lower taxes on alcohol in pubs. Rent-seeking doesn’t get more blatant than this, but the Institute of Alcohol Studies half-agrees. It never wants lower taxes anywhere – so it ignored the issue of pub prices in its press release – but it is firmly behind the call for higher off-trade prices.

The IAS was even more excited by the pub trade’s support for minimum pricing. Putting a minimum price on a unit of alcohol had the backing of 41 per cent of the publicans surveyed, against only 22 per cent against. Partial support from the drinks industry for this temperance policy is nothing new. When David Cameron was weighing up the policy in 2013, the chief executives of several pub chains publicly urged him to go ahead with it.

A minimum unit price of around 60p will raise the price of most of the alcohol sold in supermarkets but will have virtually no effect on pubs. It is easy to see why this appeals to publicans. They are, however, being short-sighted. Once the government starts setting prices for one part of the market, it is likely to extend its reach into others. In Canada, where a form of minimum pricing exists in several provinces, campaigners want a minimum price in bars and they want it to be twice as high as the minimum price in off-licences. In Alberta and Manitoba, bars have been subject to minimum pricing laws for years.

Appeasement is always a risky strategy and it is doubtful whether the pub trade’s support of minimum pricing would pay off even in the short-term. They are assuming that people are forsaking pubs because of the gulf between pub prices and supermarket prices. They are further assuming that people would visit pubs more if this gap were narrowed, even if pub prices did not fall.

This logic is appealing because a drink bought in a supermarket is a substitute for a drink bought in a pub, but there are good reasons to think that minimum pricing could have quite the opposite effect on pubs. To see why, we need to consider the counter-intuitive finding of the economists Jensen and Miller who noticed that low income consumers in China buy more rice when the price of rice goes up. The same phenomenon is said to have taken place when the price of potatoes rose in nineteenth century Ireland: people bought more of them. The law of demand predicts that a rise in price should lead to fewer sales, so how do we explain this Giffen behaviour?

Like most economic issues, it comes down to limited resources. If your budget for food is tightly constrained, you need to get the most calories for your dollar. Carbohydrates such as rice and potatoes are the cheapest sources of energy in many countries. When times are relatively good, the poor can afford to buy meat, but if the price of carbohydrates rises, they have a choice between eating less meat or eating less food.

Let’s say that 50 cents buys you rice containing 2,000 calories or meat containing 500 calories. If you have a food budget of one dollar a day, you can buy both, but if the price of rice suddenly rises by 50 per cent, what do you do?

2,000 calories of rice now costs you 75 cents. If you keep buying your 50 cents of meat, you will have to buy a third less rice and go hungry. It makes more sense to sacrifice the relative luxury of meat and buy more rice.

This may seem an extreme example that has little to do with the pub trade in wealthy countries, but it is really just a question of budgeting. If you have a set budget and fixed preferences, a rise in prices is likely to push you towards the cheapest option.

Now let’s say you want to drink ten beers a week and have £20 to spend. You have one beer a day from the supermarket at £1 each but on Saturday you go to the pub and have four beers at £3.50 each. The effect of minimum pricing will be to raise the price of your supermarket beer to £1.50. If you want to keep drinking ten beers a week, you will have to cut down to three bottles in the pub and buy an extra bottle from the supermarket.

In practice, that is only one option reflecting one set of preferences. A consumer might instead decide to increase their beer budget or to do without a couple of beers in mid-week. But of all the options available, surely the least tempting is to cut down to five or six beers a week and buy them all in The Dog and Duck – and yet that is what the consumer would have to do for minimum pricing to benefit pubs.

If the price of food in supermarkets rose by 50 per cent, no one would predict a surge in demand for expensive restaurants. On the contrary, higher supermarket prices would make consumers eat out less to save money for groceries. So it is with alcohol. Consumers are well aware that pub prices are higher than supermarket prices. If pubs were no more than an alternative location in which to buy alcohol, everybody would go to the supermarket and the pubs would be empty.

Pubgoers are buying much more than a drink. They are buying an experience, with ambience, company, service and entertainment. There is no doubt that some consumers would prefer to drink at home less and visit the pub more, but they are unable to do so because of high prices in the off-trade. But minimum pricing is not going to make a pint in a pub cheaper. It is just going to leave people who buy alcohol in supermarkets with less disposable income. Unless these people have a highly inelastic demand for pubs and a highly elastic demand for alcohol – a strange combination of preferences – they will need to cut expenditure elsewhere to maintain their alcohol intake. Buying fewer drinks in the on-trade is one way of doing this.

I am not saying that alcohol is a Giffen good (ie. a product that sells more when the price goes up) but if you look at on-trade and off-trade drinks as rival products it is easy to see how raising the price of the latter could lead to Giffen behaviour. For consumers who have a particular desired consumption level and are quite indifferent as to where they drink it, buying more of the cheapest option and less of the pricier option is a rational response, even though the cheapest option is more expensive than it used to be. Supermarket beer should be seen as the equivalent of rice and potatoes, and pubs as the equivalent of meat. When budgets are tight, we cut down on the luxuries first.