Minimum Price Legislation and Alcohol Sales: Stability, Instability, and Tipping Points
Following a recent court ruling, the Scottish government will soon implement a minimum price legislation in the alcohol industry and introduce a minimum price of 50p per unit of alcohol. Pundits predict that the new legislation will have a strong impact on spirits, with over 60% of spirits sold currently priced below the 50p threshold. Moreover, measurement company Nielsen suggests that of all alcohols sold in Scotland, wine “has the most to gain.” The legislation only requires that average wine prices be raised by a small percentage, enabling wine to be cheaper and more competitive relative to other alcohol drinks whose average prices will have to increase by a larger amount.
The sourced news article mentions that the minimum price legislation should not necessarily hurt sales in the spirits industry, “as long as demand doesn’t fall beyond a certain ‘tipping point.’” Marika Pratico, who works at Nielsen, says that to prevent causing a decline in spirit sales, demand should not fall by more than 12.5%, otherwise the demand of spirits would fall beyond the tipping point. One can assert that this heavily relates to the topic of stability, instability and tipping points, covered in both lecture and the textbook. We can argue for this by looking at the following scenario:
Let’s denote z as the fraction of consumers of spirits in Scotland. The values of 0, z’, and z’’ form a equilibria, where if all consumers believe that fraction 0, z’, or z’’ will buy the spirit drink, then the same fraction of potential consumers will eventually buy the drink. With a set of given reservation prices – the maximum price at which consumers are willing to buy the drink – network effects, and the newly introduced prices due to the minimum price legislation, 0, z’, and z’’ are values in increasing order where 0<z’<z’’. If fraction z were between z’ and z’’, there will be upward pressure on the demand of spirit drinks, as there are consumers with reservation prices higher than the price of the spirits. The increase in demand causes more potential consumers to buy the spirits until the higher equilibrium z’’ is reached, resulting in a continuous rise in sales. However, if z were slightly lower than z’, this would constitute the phenomenon Practico discusses, where the demand of spirits falls beyond the tipping point (in this case z’), thereby resulting in a continuous decline in spirit sales. This is because at a level lower than z’ or the tipping point, consumers have lower reservation prices than the spirit prices. Downward pressure is exerted on on the demand of spirits, potentially until nobody buys the spirit drinks at an equilibrium value of 0.
To conclude, we see that this scenario offers a possible explanation as to why the Scottish spirits industry, with the impending minimum price legislation, should be prepared to maintain a demand higher than the tipping point so that its revenues can continue to rise.