FTC Testifies on Implications of Recent E-commerce Study

Testifying today on behalf of the Federal Trade Commission before the U.S. House of Representatives Subcommittee on Commerce, Trade, Energy, and Consumer Protection of the Committee on Energy and Commerce, Office of Policy Planning (OPP) Director Todd Zywicki detailed the results of the FTC’s recent staff report on online wine sales in the United States, saying that e-commerce has benefitted consumers by increasing their choice in wines and providing access to a wider variety of products than previously available. While anticompetitive barriers to online wine sales and other types of e-commerce remain, the testimony states, the FTC’s report presents less-restrictive means than those currently in place to regulate consumers’ new purchasing alternatives.

The testimony begins by presenting the FTC’s experience in examining e-commerce issues, with a focus on the online sale and direct shipping of wine. In October 2002, the Commission held a workshop to study these issues, followed by the publication of a report entitled “Possible Anticompetitive Barriers to E-Commerce: Wine.” The testimony presents the findings of this report, including:

• Consumers can purchase many wines online that are not available in nearby brick-and-mortar stores. An empirical study of the wine market in McLean, Virginia, found that 15 percent of a sample of popular wines available online were not available from retail wine stores within 10 miles of McLean. In addition, by banning interstate direct shipments, states limit consumers’ access to thousands of labels from smaller wineries.
  
  
• Depending on the wine’s price, the quantity purchased, and the method of delivery, consumers can save money by purchasing wine online. Because shipping costs do not vary with the wine’s price, consumers experience the greatest savings on expensive wines, while brick-and-mortar stores may offer better prices on less expensive wines. The McLean study suggests that, if consumers use the least expensive shipping method, they could save an average of 8-13 percent on wines costing more than $20 per bottle, and an average of 20-21 percent on wines costing more than $40 per bottle.
  
  
• State bans on interstate direct shipping represent the single largest regulatory barrier to expanded e-commerce in wine. More than half the states prohibit or severely restrict out-of-state suppliers from shipping wine directly to consumers. Many of these same states, however, allow intrastate direct shipping, such as from in-state wineries and retailers.
  
  
• Many other regulations impede e-commerce in wine. These include prohibitions on online orders, very low ceilings on annual purchases, bans on advertising from out-of-state suppliers, requirements that individual consumers purchase “connoisseurs’ permits,” and requirements that delivery companies obtain a special individual license for every vehicle used to deliver wine.
  
  
• Citizens are concerned about the direct shipment of wine to minors. Some states have chosen to address this concern in part by banning direct shipment of wine to all consumers, or banning direct shipment from out-of-state sellers. Others have opted for alternatives that are less-restrictive than an outright ban.
  
  
• The states that permit interstate direct shipping generally report few or no problems with shipments to minors. Some states have applied safeguards to online sales similar to those applied to brick-and-mortar retailers, such as requirements that package delivery companies obtain an adult signature at the time of delivery. Some states also have developed penalty and enforcement systems to provide incentives for both out-of-state suppliers and package delivery companies to comply with the law.
  
  
• Several states that allow interstate direct shipping also collect taxes from those shipments. By requiring out-of-state suppliers to obtain permits, states such as New Hampshire have sought to achieve voluntary compliance with their tax laws. Most of these states report few, if any, problems with tax collection. Other states with reciprocity agreements forgo taxing interstate direct shipments altogether.

In closing the testimony, Zywicki said, “[The FTC’s] staff report concludes that consumers could reap significant benefits if they had the option of purchasing wine online from out-of-state sources and having it shipped directly to them . . . Indeed, in states that are litigating the constitutionality of direct shipping bans, several courts have found that the bans deprive the state’s consumers of lower prices and greater variety.”

Finally, the testimony points out that the wine issue has general implications for e-commerce. Anticompetitive state regulations can insulate local suppliers from online competition and deprive consumers of lower prices and greater selection. Although states have legitimate regulatory concerns, they may have less restrictive alternatives that would allow online competition and, ultimately, provide the greatest benefits to consumers. As part of its continuing focus on e-commerce, the Commission has strongly encouraged policymakers to adopt pro-competitive rules in many different industries, including contact lens sales, casket sales, and real estate and legal services.

The FTC vote to approve the testimony and place a copy on the public record was 5-0. The written statement represents the views of the FTC.

The FTC’s Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published “Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws,” which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.

Todd Zywicki
Director, Office of Policy Planning
202-326-3683

(FTC File No. P031201)