Changing Trends in U.S. Alcohol Demand

Abstract

This study uses the Fourier globally flexible functional form and shows that elasticities of substitution for beer, wine and spirits vary over time. Own-price elasticities show that demand for alcohol is inelastic. Estimates of cross-price elasticities show much variation over time between spirits, wine and beer. Cross-price elasticities between beer and wine are generally elastic. Evidence of asymmetric substitution involving beer with wine or spirits suggests alcohol expenditure depends on which product undergoes a price change, which is typically not the case for spirits and wine. Changes in the demand for alcohol over time have important implications for the effectiveness of policy aimed at reducing externalities associated with heavy drinking. Morishima elasticities of substitution have different magnitudes compared to the cross-price elasticities but similar trends.