Finitely Repeated Games: Evidence from Wholesale Alcohol Markups and Changing Liquor Laws

Abstract

In a finitely repeated game, it is expected that the competitive Nash equilibrium outcome of low prices or markups will occur when all players know the timing of the final stage of the game. In this research we examine a repeated pricing game that occurred for more than a decade between wholesale alcohol distributors In Oklahoma. In November of 2016, new liquor laws were voted on and adopted, but the new policies were not set to take effect for nearly two years. Using bi-monthly data from June 2007 to the enacting of new liquor laws in October of 2018, we show that firm behavior moved contrary to game theoretic expectations. Using this natural policy experiment setting, we show that wholesale markups steadily increased following the passing of the new law up until the final stage of the game, when the wholesale distribution system changed after the enacting of new laws.