Strategic Behavior in Whiskey Distilling, 1887-1895
by
Karen Clay
Assistant Professor
Heinz School of Public Policy
and Management
Carnegie Mellon University
Pittsburgh, PA 15213
[email protected]
and
Werner Troesken
Associate Professor
Department of History
University of Pittsburgh
Pittsburgh, PA 15260
[email protected]
This Version: May 6, 2002
* - Comments from Sara Ellison, Caroline Fohlin, Rick Geddes, Ed Lazear, Margaret Levenstein,
Nolan McCarty, and seminar participants at Caltech, Chicago, Hoover, Stanford, and the
Economic History Association meetings are gratefully acknowledged. The usual disclaimer
applies.
1. Introduction
A central issue in industrial organization and economic history is the degree to which
firms use strategic behavior to deter entry and competition. Thus far, the empirical literature on
strategic behavior has documented deviations from static profit maximization (consistent with
dynamic profit maximization), and much of this literature has been historical. There are, for
example, well-known historical studies of collusion and/or strategic behavior in the following
industries: bromine; oil refining; railroads; sugar refining; telephony; and tobacco.1 The
emphasis on history makes sense. Because combinations like Standard Oil and American
Tobacco operated during a time when federal antitrust enforcement was notoriously ineffective,
many such combinations openly engaged in predatory behavior and left a clear trail. Firms today
are not so cavalier. There is, however, a concern about selection bias. All existing historical
studies focus on the trusts that used strategic behavior successfully, even though most trusts
failed.2 As a result, we know quite a lot about American Tobacco and Standard Oil, but very
little about hundreds of less successful combinations. Yet if you want to understand why
strategic behavior emerged and worked in oil, sugar, and tobacco, you also need to understand
why it did not work in other industries.
To this end, we explore strategic behavior in whiskey distilling between 1887 and 1895.
Our goals are twofold. First, like other empirical studies, we present evidence of strategic
1
See, Levenstein, “Price Wars”; Granitz and Klein, “Monopolization”; Porter, “Cartel
Stability”; Genesove and Mullin, “Predation”; Weiman and Levin, “Preying”; and Burns
“Predatory Pricing”.
2
See Lamoreaux, Merger Movement.
1
behavior.3 The evidence is both qualitative and econometric. The econometric evidence exploits
an unusual data set that allows us to estimate firm-level demand and cost curves for the Whiskey
Trust, the dominant firm for the period under consideration. These estimates show that the
Whiskey Trust set prices below those that would have been set by a profit-maximizing firm
exploiting all of its market power. The estimates also show that after initiating an exclusive
dealing campaign designed to deter entry, the price-cost markup rose. However, despite some
limited success, these strategies ultimately failed to preempt entry, and the combination was
bankrupt by early 1895.
Which brings us to the second goal of this paper: to understand why strategic behavior
did not work in distilling. The evidence presented below suggests market structure played at
least some role. Because a distillery of minimum efficient scale could be constructed for the cost
of opening a modest restaurant, entry was not easily deterred. Along the same lines, as the data
below show, there were many low-cost substitutes for spirits so that even if narrowly construed,
the trust controlled a large market share, broadly construed, it did not. Compounding the effects
of legal entry and competition from close substitutes, a large federal tax on spirits encouraged the
development of an extensive illicit fringe. Illegal stills cost virtually nothing to construct; appear
to have been widespread; and limited the trust’s market power. Illegal entry increased after the
depression of 1893, which increased the real burden of the tax, and after the federal government
increased nominal tax rates by 22 percent in August 1894. The Whiskey Trust was also subject
to multiple antitrust suits by state and federal authorities. While federal antitrust suits had little
or no impact on market structure and performance, there is some evidence that state antitrust
3
Ellison and Ellison, “Strategic Entry” and Kadiyali, “Entry”.
2
prosecutions reduced the trust’s market power and brought an end to its use of exclusive dealing.
Except for driving up the real burden of the already large federal excise tax, the depression of
1893 played a negligible role in the demise of the trust.
This paper contributes to the existing literature on the Whiskey Trust in significant ways.
Previous studies employ only price data, and are therefore limited as to what they can tell us
about the trust’s level of market power and the success of its exclusive dealing campaign.4 In
contrast, in this paper, we derive direct estimates of marginal cost, and estimate the trust’s
demand curve directly. To our knowledge, this last point is particularly notable. No other study
of the trusts that we are aware of has assembled enough to data to estimate a firm-level demand
curve.
2. Overview of History and Industry
2.a. A Brief The History of the Whiskey Trust
The focal point of the analysis is the Whiskey Trust, which was among the most
prominent combinations of the late nineteenth century. Three factors contributed to the trust’s
prominence. First, it produced a widely consumed commodity–namely, distilled spirits. In 1880,
the average American adult consumed 2.4 gallons of spirits annually. And even though
Americans consumed more beer (11.1 gallons annually), the majority of absolute alcohol (58
percent) was consumed through spirits because spirits had a much higher alcohol content.5
Second, the Whiskey Trust was large, controlling nearly 90 percent of industry production at its
4
See Jenks and Clark Trust Problem and Troesken “Exclusive Dealing”.
5
See Downard, Dictionary, pp. 227-28. These figures refer to legal consumption of
spirits. We have no precise knowledge of the consumption of illicit spirits.
3
peak.6 Third, rivals accused the Whiskey Trust of using anticompetitive strategies, such as
predatory pricing and vertical restraints.7
The beginnings of the trust date back to the Peoria Pool of the early 1870s, a combination
that was limited to distillers located in central Illinois. A much larger pool, the Western Export
Association, formed in 1881. Industry observers claimed the association was created because
overcapacity had depressed prices. To increase prices, the association set production limits for
members, and members who produced in excess of their limit were required to export the excess
at their own expense. However, from its inception, the pool was beset by cheating, market entry,
and periodic price wars.8
After the pools failed, distillers organized the Distillers and Cattle Feeders’ Trust, better
known as the “Whiskey Trust” in May 1887. Modeled after Standard Oil, the Whiskey Trust was
a bona fide trust so that when a distillery joined the trust it surrendered control of its operations
to a board of trustees. Of the eighty-six distilleries that eventually joined the combination, only
ten or twelve were kept in operation; the remainder were shut down. However, during the 1880s,
state courts raised questions about the legality of trust arrangements. In 1890, fearing dissolution
by state courts, the Distillers and Cattle Feeders’ Trust reorganized as an Illinois corporation, the
Distilling and Cattle Feeding Company. Although no longer a trust in the strict sense of the term,
6
See United States, Industrial Commission, p. 77; hereafter cited as IC.
7
See Troesken, “Exclusive Dealing”.
8
See Downard, Dictionary, p. 213; IC, pp. 76, 168-69; and Lamoreaux, Merger
Movement, pp. 99-101.
4
the combination was still referred to as the Whiskey Trust.9
The trust entered receivership in January, 1895, and reorganized as the American Spirits
Manufacturing Company, a New Jersey corporation, in the fall of 1895, though this new
combination never realized the market dominance of its bankrupt predecessor. Instead of
reviving a rebate plan it had implemented years earlier, American Spirits chose a new form of
vertical integration and set up a subsidiary company to distribute its products. This more explicit
form of vertical integration had at least two attractive features: it was less susceptible to antitrust
prosecution; and it allowed some difficult monitoring problems associated with the trust’s rebate
program, which is described in detail later in the paper and in other published work.10
The failure of the Whiskey Trust is puzzling when one compares the combination to its
more successful counterparts in other industries. Like Standard Oil and the Sugar Trust, the
Whiskey Trust controlled a large market share; was accused of using strategies to deter entry,
such as predatory pricing, vertical restraints, and violence; and aggressively sought ways to cut
costs. For example, trust-affiliated distilleries were the largest in the industry and were among
the first to adopt the use of copper tubing, which enhanced productivity. The trust also hired a
noted Japanese chemist, Jokichi Takamine, who tried to improve the fermentation process by
using wheat bran rather than barley malt. Why, given all of these similarities with Standard Oil
and the Sugar Trust, which by all accounts were highly successful combinations, did the Whiskey
Trust fail? The analysis below answers this question.11
9
IC, pp 75-90; and 171.
10
See IC, pp. 78 and 835; and Troesken “Exclusive Dealing”.
11
See Troesken “Exclusive Dealing”.
5
2.b. Technology and Cost Estimates
The Whiskey Trust produced and sold alcoholic spirits. Manufacturing alcoholic spirits
entailed grinding corn into meal; soaking the meal in water; adding malt, which converted the
corn starch into sugar; and using a small amount of yeast, which initiated fermentation and
converted the sugar into alcohol. After fermentation, the corn mash was twice distilled and
charcoal filtered to yield alcoholic spirits. As this description implies, the manufacture of spirits
employed a fixed-proportions production technology predicated mainly on corn and malt, and
there was little, if any, substitutability across these inputs. Partly because grain was central to the
production of alcoholic spirits, most distilleries located in the Midwest and there was an
especially high concentration of distilleries around Peoria, Illinois. (Fixed costs are discussed
thoroughly later in the paper.)12
Given this technology, we characterize the cost of producing a gallon of alcoholic spirits
(c) as follows:
(1)
c = k*P g + J,
where k is the amount of grain, in bushels, needed to produce a gallon of spirits; P g is the price of
grain per bushel; and J is federal tax on spirits per gallon. The price of grain, P g, is a weighted
average of the price of corn and malt, such that,
(2)
P g = 1 cP c + 1 mP m,
where, 1 c and 1 m are the cost shares of corn and malt; and P c and P m are the price of corn and
malt, per bushel. Although we do not know the precise cost shares of corn and malt, we do know
that the production of spirits involved more corn than malt per bushel. In keeping with this fact,
12
See IC, pp. 91, 201-02; and Troesken “Exclusive Dealing”.
6
the upper-bound cost estimate assumes 1 c = 60 %, and 1 m = 40%, while the lower-bound
estimate assumes 1 c = 95%, and 1 m = 5%.13
Following the observations of industry insiders, we do not consider either labor or fuel as
components in marginal cost; they were, instead, fixed or at least quasi-fixed inputs. Industry
observers considered labor a fixed cost because employment remained the same regardless of
output. Contemporary observers believed that the cost of labor was “not a significant factor” in
distilling, and evidence for this position pointed to the fact that the distilling industry had never
experienced a strike in its entire history through 1900. In any case, there is very little variation in
wages over the period of study period.14 Fuel was much the same. The amount of fuel used did
not vary smoothly with output; and was largely independent of normal variations in production.
According to industry observers at the time, distilleries located in and around Peoria not so much
because of the town’s proximity to coal deposits, but because of its proximity to corn and
underground water sources that provided an “illimitable supply” of pure water at just the right
temperature.15
Table 1 presents the estimates of c and k using annual data. The estimates are constructed
by taking annual average prices and production figures based on monthly data, and then
13
Unfortunately, we only possess data on the aggregate amount of grain used, as opposed
to data on the separate amount of corn and malt used. If disaggregated data were available, we
could estimate kc + km individually and construct more precise estimates of marginal cost.
14
IC, pp. 90, 185-91, 848.
15
IC, pp. 89, 201, and 202. On p. 89, the IC reports: “. . . the special water supply is of
very great advantage. There is an unlimited quantity of water from wells about 30 feet deep,
having a temperature the year around of about 54 degrees. This is used for cooling the warm
mash and is much more satisfactory and economical than ice.”
7
performing the appropriate multiplication as described in Table 1. Four patterns require
additional comment. First, k was falling over time. This decline reflects the introduction of
copper tubing and chemical innovations hastening the process of fermentation, both of which
improved efficiency in the distilling industry. Second, the federal tax, which was between 90
cents and $1.10 per gallon, was large relative to the before-tax cost of distilling (k*P g ), which
was roughly 10 to 25 cents per gallon. Third, the difference between the upper and lower bound
estimates of the before-tax cost of distilling (k*Pg) is between 20 and 40 percent, while the
difference between the upper and lower bound estimates of the after-tax cost (c) is between 2 and
4 percent. Fourth, the cost estimates derived here do not include other potential determinants of
the marginal cost of distilling, such as coal and yeast. To this extent, in the analysis that follows,
the cost estimates might lead us to overestimate markups and therefore overstate the case for the
trust setting unusually low prices. However, in empirical work elsewhere we show that coal,
yeast, and other miscellaneous components of cost represented a minuscule portion (less than 1
percent) of total marginal cost.16
2.c. Market Definitions
Alcoholic spirits were perfectly homogenous; their content and flavor were identical
across all producers. Almost never consumed directly, alcoholic spirits were usually sold to
rectifiers and distributors, who blended the spirits with water, brown sugar, and other flavors to
create rectified whiskey. In contrast to more expensive straight whiskey, such as bourbon and rye
whiskey, rectified whiskey required no aging and could be consumed immediately.
We suggest two measures of the trust’s market share, one narrow and one broad.
16
See IC, pp. 88-89, 202-5, 215.
8
According to the narrow definition:
(3)
narrow market sharet = (trustqt)/(alcoholic spiritst),
where, trustqt is the trust’s production of alcoholic spirits in year t; and alcoholic spiritst is the
total domestic production of alcoholic spirits in year t (no alcoholic spirits were imported during
the period under consideration). Within this narrowly defined market, substitution was costless;
as noted above, alcoholic spirits were perfectly homogeneous across all producers. According to
a broader market definition:
(4)
broad market sharet = (trustqt)/(distilled spiritst),
where distilled spiritst is total domestic production of all types of distilled spirits in year t, which
includes alcoholic spirits, bourbon, brandy, gin, rum, and rye whiskey. Within this broadly
defined market, substitution was possible but not costless. Alcoholic spirits, and their derivative
product, rectified whiskey, were generally cheaper (per unit of alcohol) and poorer tasting than
bourbon, brandy, gin, rum, and rye whiskey. Of course, still broader market definitions are
possible if one considers the production of beer, malt liquor, and wine.
Table 2 presents data on production and market share. As Table 2 shows, a narrow
market definition suggests the Whiskey Trust’s market share peaked at 87 percent in 1893, while
a broad definition suggests the trust’s market share never rose above 45 percent and was as low
as 20 percent in 1894 and 1895. Competition from substitutes for spirits, such as beer, appear to
have played a role in disciplining the trust. This can be seen in Tables 3 and 4, which report
demand curve estimates for the trust. Although other aspects of these demand curve estimates
will be discussed in detail later in the paper, they indicate that the cross-price elasticity of
demand was such that a 10 percent reduction in the price of beer (as proxied by the price of hops)
9
would have lead to a 3 to 9 percent reduction in the demand for trust-distilled spirits. The crossprice elasticities of demand with other alcoholic products, such as wine and bourbon, were
probably similar.
3. Did the Whiskey Trust Price Strategically?
According to industry observers, the Whiskey Trust initially used (unusually) low prices
to deter future entry and to encourage existing firms to join the trust.17 We refer to this period of
low prices as the low-price regime. The low-price regime begins with the formation of the trust
in May, 1887 and ends in June, 1890, when the trust began its exclusive dealing program. The
analysis proceeds as follows. We first present a formal econometric test, which yields evidence
that the trust set prices lower than those that would have been set by a firm practicing static profit
maximization. We then supplement the econometric evidence with quotations from industry
insiders and observers consistent with the idea that the trust was setting unusually low prices.
To test for unexpectedly low prices, we conducted the following three-part test. The test
is based on the hypothesis that the trust refrained from exploiting all of its short-run market
power because it feared inducing entry in the long run and because it wanted to induce existing
firms outside the trust to join the combination. First, we estimated the trust’s short run demand
curve. We then calculated the implied (static profit-maximizing) price-cost markup for the trust.
That is, the markup that would have occurred had the trust behaved as a static profit maximizer.
Finally, we compared the implied markup to the observed markup. The observed markup is
calculated using cost estimates derived from equations (1) and (2). We calculate the markup as:
17
See Jenks and Clark, Trust Problem, and Jenks’ discussion of the Whiskey Trust in IC,
p. 47.
10
[p-c]/c, where p is price per unit, and c is cost per unit. This three-step procedure is similar to
Kadiyali’s study of entry deterrence in the photographic film industry. Kadiyali estimates price
and advertising elasticities and then argues that, given these elasticities, observed prices and
advertising expenditures by Kodak were inconsistent with static profit maximization.18
How this procedure works for distilling can be seen by noting that a (static) profitmaximizing firm, would set price ( p) so that:
(5)
p =
1
c,
(1 - 1/0 f )
where, c equals marginal cost; and 0 f equals the price elasticity of the firm’s demand curve.
From this expression, a static profit maximizer confronting a demand curve with an elasticity of
2 would set prices 100 percent above marginal cost, while a firm confronting a demand curve
with an elasticity of 10 would set prices 11 percent above cost. Suppose that the Whiskey Trust
faced a demand curve with an elasticity of 10. If the trust regularly set prices that were less than
11 percent above marginal cost, this would be inconsistent with static profit maximization, and
suggestive of strategic behavior.
Firm-level data on output prices, sales, and factor prices are employed in estimating the
trust’s demand curve and in calculating the observed price-cost markup. The data are monthly,
and extend from April, 1888 through June, 1890, which covers nearly all of the trust’s low-price
regime. Output prices are the list price of alcoholic spirits for trust-affiliated distilleries located
in Peoria, Illinois, where the production of spirits was centered. Data on quantity sold are based
on the trust’s sales of alcoholic spirits. As instruments, we use the federal tax and the price of
18
Kadiyali, “Entry”.
11
corn and malt per bushel.19
Three different demand specifications are estimated: linear; log-linear; and exponential.
This helps ensure that the results are not driven by the imposition of a particular functional form.
Also, to control for changes in income and changes in the price of close substitutes, a monthly
index of industrial production and the price of hops (a primary input in beer) are included as
exogenous variables in the demand equations.
Table 3 reports regression estimates, the implied markup, and relevant confidence
intervals for the low-price regime. The results are robust to alternative functional forms, with all
three demand specifications yielding elasticity estimates of roughly 4.4. Point estimates imply
that, had the trust behaved as a static-profit maximizer, it would have set prices 29-31 percent
above cost. Using upper-bound estimates of elasticity (those equal to the 95th and 99th
percentiles), the price-cost markup would have been no less than 13 percent. Observed markups,
however, generally fall well below these thresholds, averaging between 4 and 8 percent during
the low-price regime. Figures 1 and 2 plot the observed markups during the low-price regime
using upper and lower-bound cost estimates. These figures also plot the lower-bound estimate of
the implied markup (indicated by the horizontal line at .13). According to these figures, the
observed markup nears the estimated lower-bound implied markup only briefly and is usually 1617 percent of the point estimate of the implied markup. The fact that observed markups are so
much smaller than the implied markup constitutes evidence the trust was setting prices
19
Price and sales data are from IC, pp. 212-15; and 818-25. Corn and malt prices are from
IC (pp. 818-25); United States, Bureau of Labor Statistics, pp. 446-47; United States, Census of
Manufacturers; United States, Agriculture, pp. 66-67). All price data have been adjusted for
changes in the general price level using McCusker, How Much.
12
strategically in an effort to deter future entry, to encourage existing firms to join the trust, or for
some other reason.20
Although we cannot rule out the possibility that the trust’s price-setting behavior was the
result of ignorance of the demand elasticity, qualitative evidence does suggest that market entry
was a serious concern for the trust, as well as the pools that preceded it, and that market entry
was prompted by efforts to raise price above marginal cost. A government investigation of the
industry conducted in 1899, found that only if distillers “kept prices low” would they not
“provoke competition.” For example, when the pools that preceded the trust tried to raise prices,
they not only induced cheating among internal members of the pool, they also induced outsiders
to build their own distilleries and enter. Outside entry played a central role in the demise of the
aforementioned Western Export Association, which dominated the distilling industry during the
1880s. Similarly, after the trust abandoned its low-price strategy and began raising prices, “new
distilleries were erected, and it was found impossible to maintain . . . high prices.” Finally, the
same government investigation solicited testimony that the trust often cut prices in an effort to
induce outside firms to join the trust.21
20
Demand curves are also estimated using quarterly (as opposed to monthly) data. The
elasticity estimates and implied markups are very similar, and yield the same conclusion: the
trust generally refrained from exercising all of its market power.
21
The quotations are from IC, pp. 81, 76 and 81, respectively. Government investigators
based these observations and conclusions on the testimony of John McNulta, who acted as the
court appointed receiver of the trust after it had entered bankruptcy proceedings; Martin R. Cook,
a wholesaler liquor dealer; and Charles C. Clarke, the owner of Peoria distillery that was part of
the trust before its demise.
13
4. Exclusive Dealing and the Whiskey Trust
4.a. Overview of the Exclusive Dealing Program
The Whiskey Trust operated an exclusive dealing program between 1890 and 1895. This
program was central to the trust, and engendered much hostility from competitors and
government authorities–federal officials claimed the program violated the Sherman Antitrust Act.
The details of the trust’s exclusive dealing program are described in a previously published
paper, and there is no need to retell these details in all of their complexity here. Suffice it to say
that the trust used rebates to encourage distributers to carry only whiskey made with trustdistilled spirits. Between 1890 and 1891, the trust set the rebate at five cents per proof gallon.
Between 1891 and the summer of 1894, it raised the rebate to seven cents per proof gallon.
During the fall and winter of 1894, the trust reduced the rebate to two cents per proof gallon.
Compared to the price of spirits, the rebate was substantial. At the time, the before-tax price of
spirits ranged from ten to thirty cents per gallon; the after-tax price of spirits ranged from one
dollar to $1.20.
Some economists argue that firms can use exclusive dealing to increase their rivals’ costs
and deter entry. In the usual anticompetitive story, manufacturers use exclusive dealing to
foreclose scarce distribution outlets. This makes it costly for new firms to enter. If new
companies decide to enter, they must do so as vertically-integrated enterprises, operating both as
manufacturers and as distributors, because incumbents have tied-up all distributing outlets.
Alternatively, new entrants could try to offer similar incentives as the incumbent to encourage
distributors to carry their product. But this too could be costly if pre-existing contractual
arrangements with the incumbent firm impose penalties on distributors who deal with competing
14
producers.22
4.c. Testing for Anticompetitive Effects
We perform two tests to see if the trust’s rebate program had anticompetitive effects.
First, we estimate the trust’s demand curve during periods when it offered rebates, and periods
when it did not. If the rebate program prevented entry and competition, the trust’s demand curve
would have become more inelastic after the rebate program began. This tests exploits the same
firm-level data described above, except that these data cover the exclusive dealing regime which
extends from June, 1891 through July, 1894. Second, using the same data, we examine the
behavior of the price-cost markup before and after the implementation of the trust’s rebate
program. If the rebate had anticompetitive effects, the price-cost markup would have risen after
the rebate program began. A caveat is in order, however: to the extent the trust initiated the
rebate program because it had lost (gained) market power, these procedures will understate
(overstate) its anticompetitive effects.
Table 4 reports the demand estimates for the exclusive-dealing regime. The difference in
the estimated elasticity of demand during the limit pricing and exclusive-dealing regimes, are
trivial, both economically and statistically. However, stronger evidence that exclusive dealing
had an effect emerges when we look at the behavior of the price-cost markup over time. Figures
1 and 2 plot the observed monthly mark-up across three regimes, where regime shifts are
22
See Krattenmaker and Salop, “Competition”; and Salop and Scheffman “Raising”.
There is a competing view which holds that exclusive dealing promotes efficiency. Among other
things, exclusive dealing might protect relationship specific investments and prevent competitors
from free riding on a firm’s advertising expenditures. See Bork Antitrust Paradox, pp. 193-207;
and Posner Antitrust, pp. 171-205. Given the nature of distilling, it seems highly unlikely that
this Chicago School view of exclusive dealing could have applied to the Whiskey Trust.
15
indicated by vertical lines. The first line indicates the transition from the trust’s limit pricing
regime to the exclusive dealing regime; and the second line indicates the transition from the 90
cent tax rate to $1.10. (Discussion of this final tax-related transition is given later in the paper.)
Figure 1 plots the markup using the upper-bound cost estimate, and figure 2 plots the markup
using the lower-bound cost estimate. In both figures, the data have been smoothed slightly using
Cleveland’s running-line smoother (bandwidth = .2). The figures suggest that the exclusive
dealing program inhibited entry and gave the trust greater market power. Notice that with the
introduction of the rebate, the markup began to trend upward, and this upward trend did not stop
until the tax increase in 1894.23
5. Did Antitrust Enforcement Cause the Failure of the Whiskey Trust?
The evidence just presented suggests the Whiskey Trust behaved strategically in an effort
to deter competition, yet the trust was bankrupt by early 1895. This raises the question: why did
strategic behavior fail to protect the Whiskey Trust from competition? Sections 5, 6, 7, and 8
consider four possible explanations: antitrust enforcement; the depression of 1893; market
structure; and changes in the federal tax on spirits.
The Whiskey Trust was prosecuted for violating both state and federal antitrust laws. The
federal cases against the trust were inspired by wholesalers dissatisfied with the trust’s rebate
system. Wholesalers claimed that the trust refused to redeem their rebate vouchers after they
purchased alcohol from companies not associated with the trust, and lobbied federal officials to
23
This confirms the results of a previous paper, Troesken “Exclusive Dealing”, which
showed that after the initiation of the trust’s exclusive dealing regime, there was a significant
break in the trend in the price of spirits, with prices trending upward at a steeper rate than
previously.
16
take action against the rebate program. Federal prosecutors responded, and indicted the trust for
violating the Sherman Antitrust Act. According to prosecutors, the rebates constituted a restraint
of trade because they prevented wholesalers from purchasing spirits from competing distillers.
Federal courts, however, consistently ruled that the rebate program did not violate the Sherman
Act.24
State courts were less sympathetic to the trust. In June1890, the Nebraska Supreme Court
sustained a lower court ruling and ordered the Nebraska Distilling Company, a trust-affiliated
distillery, to remove itself from the Whiskey Trust. Anticipating the supreme court’s final
decision, the owners of the Nebraska distillery had reconfigured the plant to produce cereal and
malt several months earlier. Significantly, Nebraska won its case against the Whiskey Trust
without the aid of either state or federal antitrust laws. In prosecuting the trust, the Nebraska
attorney general used what was known as a quo warranto proceeding. Through such
proceedings, state officials were able to revoke the charters of corporations that had violated
provisions of their corporate charters by joining or forming monopolistic combinations.
Attorneys general in California, Illinois, Louisiana, New York, and Ohio used the same legal
device to successfully attack the Cotton Oil Trust; the Chicago Gas Trust; the Standard Oil Trust;
and the Sugar Trust.25
The actions of the Nebraska courts, as well as the adverse decisions against other trusts,
concerned the managers of the Whiskey Trust and prompted them to reorganize as an Illinois
24
New York Times, December 22, 1892, p. 9; CT, January 8, 1892 p. 5; In re Greene, 52
F. 104 1892; In re Corning et. al., 51 F. 205 1891; U.S. v. Greenhut et. al., 50 F. 469 1892;
hereafter all citations to the New York Times are given by NYT.
25
See Troesken “Before Sherman” and “Did the Trusts?”.
17
corporation in February, 1890. Oddly, managers of the Whiskey Trust pointed to the suits
against the Sugar Trust as more worrisome than their own legal travails.26 Once organized as an
Illinois corporation, the Whiskey Trust functioned much like a holding company, owning a
majority interest in all of its constituent distilleries. Except for the removal of the Nebraska
Distilling Company from the Whiskey Trust, the distilling industry was no less concentrated than
it had been before the Nebraska ruling. This can be seen more clearly in Table 2, which shows
the trust’s market share over time. Using a narrow market definition, notice that between 1889
(the year of the Nebraska decision) and 1890, market share fell only slightly from 79 to 76
percent, but rebounded in subsequent years. Large reductions in market share did not occur until
1894.
In the summer of 1893, the Illinois attorney general filed suit against the Whiskey Trust,
claiming that the combination was in violation of the Illinois antitrust law. The attorney general
sought to revoke the charter of the trust. Two years later, the Illinois Supreme Court sustained a
lower court, and ordered the dissolution of the Whiskey Trust. Writing for the court, Justice
Bailey argued that by acquiring distilleries for the purpose of “crushing out competition and of
establishing a monopoly,” the trust had “misused and abused the powers granted by its charter,”
and as such, “rendered itself liable to prosecution” and ouster from the state.
The ultimate effects of the Illinois antitrust suit are unclear. On the one hand, it is
possible that the trust discontinued the rebate program because of the Illinois antitrust suit. The
lower-court ruling against the trust was handed down in late-September, 1894; two weeks later,
in early October, the trust announced that it would stop the rebate program. On the other hand,
26
IC, p. 171.
18
by the time the lower Illinois court ruled in September, 1894, the trust was already in serious
financial trouble. Rumors of bankruptcy and receivership for the trust were heard as early as
1893. By the time the Illinois Supreme Court ruled in June, 1895, the trust had already been in
receivership for several months. Also, the trust’s management claimed that it was customer
dissatisfaction that lead it to abandon its rebate program.27
In addition to the antitrust rulings narrowly construed, however, they might have been
another avenue through which the courts mattered. When the trust refused to pay out on rebates
it had issued, several whiskey wholesalers sued, demanding payment. The trust claimed that it
did not have to pay the rebates because the wholesalers had purchased spirits from distilleries not
affiliated with thrust. The wholesalers claimed otherwise. In one decision issued in 1892 and a
second decision issued toward the end of the trust’s existence in 1894, the courts agreed with the
wholesalers and forced the trust to redeem the rebates. If the courts refused to enforce the
exclusivity of these rebates they would have lost whatever power they possessed to undermine
entry and competition.28
27
A circular issued by the trust explained: “At the request of the patrons of this company,
we have decided to discontinue the issuance of all rebate vouchers. . . . While we believe the
that the rebate system has been a great advantage to wholesalers around the country, we willingly
accede to the wishes of our customers.” According to the Chicago Tribune: “abolishing the
rebates is regarded by many as a severe blow to the trust, but the opposing forces were so
powerful that the company did not dare refuse their demands.” See Chicago Tribune, October
12, p. 8.
28
William Newberger sued and won when the trust refused to honor his vouchers. See
New York Times, December 21, 1892, p. 1. Similarly in Gottschalk Company v. Distilling &
Cattle Feeding Company, 62 F. 901 (1894), a Chicago court allowed Gottschalk to redeem his
vouchers despite the trust’s claims that Gottschalk had purchased from non-trust houses. If the
plaintiff had, the court said, it was accidental. Gottschalk had accumulated $35,000 worth of
rebate vouchers.
19
6. Did the Depression of 1893 Cause the Demise of the Trust?
Another plausible explanation for the demise of the trust focuses on the depression of
1893. During that year, industrial production and wholesale prices fell by 25 and 18 percent.
The depression of 1893 might have contributed to the demise of the trust through two avenues.
First, through an income effect, the depression might have reduced the demand for alcoholic
spirits. This assumes alcoholic spirits were a normal good, an assumption consistent with both
qualitative and econometric evidence: during the 1890s, industry observers claimed that more
alcohol was consumed in “good times than in bad”;29 and the regression results reported in tables
3 and 4 suggest industrial production (income) was positively correlated with quantity demanded.
The second avenue, referred to as the “tax effect”, is less direct. By reducing the general price
level by nearly 20 percent, the depression drove up the real burden of the tax (which was fixed at
90 cents per gallon), increasing the cost of spirits and reducing quantity demanded. In addition,
increasing the tax might have caused production costs for the trust to rise relative to illicit
(untaxed) producers. This in turn would have increased black market activity and reduced
demand for legally-produced spirits.
Figure 3, which plots monthly data on quantity sold for the trust, suggests the depression
of 1893 might have been an important factor in the demise of the trust. Before January 1893,
there appears to be a mild upward trend in quantity sold, but after that month, there is a clear
break in the data and quantity sold drops sharply. However, from this graph alone, it is
impossible to disentangle the income effect from the tax effect. To identify the relative impact of
the income and tax effects, we estimate quantity demanded under three counterfactual scenarios.
29
IC, p. 834.
20
Scenario one identifies the effect of tax changes, independent of the reduction in income
associated with the depression of 1893. This calculation effectively answers the question,
“holding income constant, how much would have been demanded, if the tax (in real terms) had
never risen above the level it reached in December 1892?” Scenario two identifies the effect of
income reductions, independent of any increases in the tax. In effect, this calculation answers the
question, “holding the tax rate constant, how much would have been demanded if industrial
production had never fallen from the level it reached in December 1892?” Scenario three
identifies the joint effect of changes in income and taxes.30
Figure 4 plots predicted quantity demanded under the three counterfactual scenarios and
under actual events. The results suggest the income effect was small relative to the effect of tax
changes. If taxes had remained constant, quantity demanded would have dipped modestly and
recovered strongly in 1894. If industrial production had remained constant, quantity demanded
would have continued to fall, and dropped sharply during 1894 when the government increased
the nominal tax from $.90 to $1.10 per gallon. The effects of tax changes are discussed further
in section 9.
7. Did Market Structure Cause the Demise of the Trust?
In distilling, fixed costs included labor, fuel, the cost of containers, and plant and capital.
That labor and fuel were quasi-fixed inputs is explained above. By law, distillers were required
30
To arrive at these counter-factual estimates, we first estimate a demand curve under
actual conditions. We then use the resulting coefficient estimates to create counter-factual
worlds. In essence we ask, holding everything else constant, what would have happened to
demand if the real burden of the tax rose, but industrial production did not fall? What would
have happened if the real burden of the tax remained constant, but industrial production fell?
And so on.
21
to store and ship alcoholic spirits in barrels. Distillers typically owned the barrels and viewed
them as capital, using the same barrel repeatedly. 31 Economies of scale were exhausted at fairly
low levels of output. Industry observers argued that minimum efficient scale was obtained when
a distillery reached the capacity to process three to five thousand bushels of corn a day (about 5
percent of the market). As one distiller explained, “after this limit is reached,” a large distillery
“can not produce any more liquor per bushel of corn” than a small distillery. 32 In terms of the
costs of plant and capital, a distillery with the capacity to supply 10 percent of the market could
have been constructed for roughly $2 million 1999 dollars, less than it costs to open a small
restaurant.33
Given the ease of entry it is probably not surprising that the trust’s efforts to raise prices
failed, even if the efforts to increase prices were accompanied by an aggressive exclusive dealing
campaign. When the trust raised prices it induced new firms to enter. These firms circumvented
the trust’s exclusive dealing campaign by entering as vertically integrated enterprises. By doing
so, they created their own distribution outlets and therefore did not have try to break into the
existing distributer-ships locked into carrying trust-distilled spirits. Press accounts and previous
research suggest that as these new vertically-integrated firms entered, they undercut the trust and
gradually eroded its market share and profitability.
31
IC, pp. 92, 228-30.
32
IC, pp. 254-55.
33
On the cost of constructing a distillery, see IC, pp. 184, 203, 248-249. On the costs of
opening a restaurant, see Pittsburgh Post Gazette, April 13, 1999, p. F.1.
22
8. Tax Changes and Illicit Entry
8.a. The Costs of Illicit Entry
A still with the capacity to produce a barrel a day could have been constructed for as little
as $1400 (1999 dollars). Although there are no precise data on the production of stills, industry
observers suggested illicit production was as high as 30-40 million gallons per year, or about 4050 percent of legal production. In addition, illicit production was not limited to remote,
Appalachian locations, as common folklore suggests. Government investigators in 1900 found
that illicit production “was all over the county,” including major cities such as New York and
Chicago.34
There was also a class of distilleries known as “registered stills.” These were very small
distilleries, located mostly in the South, that were licensed by the government. At large
distilleries (like those in the trust), IRS officials monitored production daily, and they monitored
everything, how much grain was used; how many employees there were; how many barrels were
used; how much alcohol was in the barrels, etc. At registered stills production was only
estimated, and the taxes were paid based solely on these estimates. In the South alone, there
were about 6,500 registered stills. The typical registered still had the capacity to process about 5
bushels of grain per day, while the very largest distilleries in the industry had the capacity to
process 10 to 15 thousand bushels per day. Despite the vast size difference, large distilleries had
a relatively small cost advantage–the pre-tax cost of distilling a gallon of spirits at a distillery
with a 15,000 bushel capacity was no more than 20 percent lower than the pre-tax cost at a
34
IC, pp.825 and 41.
23
distillery with a 5 bushel capacity.35
8.b. The Tax Change and Illicit Entry
For our time period, the federal government changed the tax on spirits only once: in
August, 1894, the federal government increased the nominal tax from $.90 to $1.10 per gallon. If
this change in the federal tax induced increased entry and production from illicit producers, the
tax changes might have contributed to the demise of the trust. To see if increases in the tax, and
corresponding increases in illicit production, contributed to the demise of the trust, we conduct
two tests. The first test merely establishes the plausibility of the hypothesis that illicit production
increased with the tax. Although there are no data on the actual output of illicit stills, there are
data on the number of stills seized each year by IRS agents. To the extent still seizures reflect
illicit production, one would expect seizures to increase as the tax increased. A simple
regression indicates that following the tax increase, seizures increased by about 40 percent. The
central concern with this approach, however, is that IRS enforcement also probably rose with the
increase in the tax, and it is impossible (with the data available) to disentangle the effects of
increased illicit production and increased enforcement.
In the second test, we estimate the elasticity of the trust’s demand curve following the tax
increase. If the tax increase induced illicit entry, the trust’s demand curve would have become
more elastic in the face of increased competition. Table 5 reports the regression results.
Elasticity estimates are between 52 and 74 for the high-tax period, compared to estimates
between 4 and 5 for the low-price and exclusive dealing regimes. Unfortunately, there are only
seven observations available to estimate demand during the high-tax period. Given this,
35
IC, p. 844.
24
industrial production and the price of hops have been dropped as exogenous regressors.
Dropping these regressors makes it difficult to compare the elasticity estimates in Table 5 to the
estimates in Tables 3 and 4. To address this concern, the price of hops and industrial production
are dropped from the demand estimates for the low-price and exclusive-dealing regimes, making
it easier to construct meaningful comparisons across regimes. When hops and industrial
production are dropped, elasticity estimates during the low-price and exclusive regimes rise only
slightly, to between 5 and 6. As in the second test, there is also a concern that the effect of
terminating the rebate program might be conflated with the effect of the tax increase. However,
the estimated demand elasticity was not significantly affected by the introduction of the rebate
program–as noted above, point estimates of elasticity are nearly identical across the low-price
and exclusive-dealing regimes.
Section 9. Conclusions
We find evidence the Whiskey Trust behaved strategically. Initially, the trust set prices
low in an effort to deter entry and to induce existing competitors to join the trust. Evidence of
this “low-price” regime is based on the observation that the trust charged prices well below those
implied by static profit maximization. When low prices failed to deter entry, the trust turned to
exclusive dealing. The anti-competitive effects of the trust’s exclusionary rebate program is
confirmed by the behavior of the price-cost markup over time. After the trust initiated the
program, the markup rose steadily.
Despite the trust’s many efforts to deter entry and competition, it ultimately failed to do
so. The trust’s low-price regime might have deterred some entry, but after the trust began to
steadily raise prices during its exclusive dealing regime, new distilleries grew-up, in the words of
25
one observer, “like mushrooms in the night.”36 Initially, new entrants had to vertically integrate
(into distilling, rectifying, and wholesaling) to get around the trust’s rebate program, but over
time, the trust’s market position eroded to such a point that even firms that were not vertically
integrated were able to enter. In addition to legal entry, the trust confronted competition from a
large illicit fringe, a fringe that was made even larger following increases in the real tax rate in
1893 and 1894. Evidence that the illicit fringe rose with the tax rate comes from an examination
of the price-cost markup and demand elasticities over time. After the tax rate rose, demand
elasticity increased significantly.
There were several factors that undermined the ability of the trust to dominate its market.
First, while federal antitrust enforcement played a minor role in the demise of the trust and its
rebate scheme, state antitrust regulation was probably important. Federal courts ruled that the
rebates did not violate the Sherman Antitrust Act, and had no impact on market structure or firm
profitability. In contrast, state courts forced the trust to adopt new organizational forms; might
have helped prompt the trust to discontinue its exclusionary rebate program; and reduced firm
profitability, at least in the short run. Second, entry barriers in distilling were very low, and the
trust was able to do little to raise them. As a result, it was subject to frequent entry whenever it
tried to raise prices above competitive levels. Third, there was some competition from an illicit
fringe, but it is unclear how important that was. Fourth, competition from close substitutes, such
36
Clearly, many of our ultimate conclusions mirror the arguments Jenks presented many
years ago in the Trust Problem and his write-up in IC, see especially pp. 45-48. Nonetheless, we
also believe we have extended Jenks in many ways. As noted earlier, Jenks did not have offer
any of the evidence we have produced on demand elasticities, price-cost markups, violence, or
antitrust enforcement. Nor did Jenks frame his analysis using the terms and tools of modern
industrial organization as we have.
26
as beer, limited the trust’s ability to monopolize the relevant market. Finally, the depression of
1893 played a negligible role in hastening the demise of the trust. Demand estimates indicate
that even if the depression had never occurred, the trust still would have failed.
The implications of these results are fourfold. First, as one of several empirical studies of
strategic behavior, this paper documents the use of strategic behavior in a specific industry.
Second, the results here complement the recent findings of Genesove and Mullin.37 Genesove
and Mullin show that the rate of return to predatory behavior in sugar refining was as high as 60
percent; the results of this paper suggest predation had a much lower rate of return in distilling.
The differences in the effectiveness of predation across the whiskey and sugar industries
probably stems from the fact that entry barriers are much higher in sugar than whiskey. Also, the
stark contrast between sugar refining and distilling highlights the importance of considering the
trusts that failed (like the Whiskey Trust) as well as those that succeeded (like the Sugar Trust).
Third, the results here suggest black markets might play a role in limiting the market power of
large, dominant firms.
37
See Genesove and Mullin, “Predation”.
27
References
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28
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29
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30
Table 1
Cost Estimates
c*1 c =.95, 1 m =.05
c*1 c =.6, 1 m =.4
year
k
Pc
Pm
J
Pg
k*P g
k*P g + J
Pg
k*P g
k*P g + J
1881
1882
1883
1884
1885
1886
1887
1888
1889
1890
1891
1892
1893
1894
1895
1896
1897
1898
.27
.26
.26
.26
.25
.24
.24
.24
.24
.23
.23
.23
.21
.22
.23
.23
.22
.22
.63
.67
.53
.52
.43
.37
.39
.46
.35
.40
.59
.46
.40
.43
.40
.26
.26
.32
1.1
.83
.78
.74
.74
.76
.89
.88
.76
.75
.93
.80
.78
.74
.69
.56
.54
.62
.9
.9
.9
.9
.9
.9
.9
.9
.9
.9
.9
.9
.9
.98
1.1
1.1
1.1
1.1
.65
.68
.54
.53
.44
.39
.42
.48
.37
.41
.60
.48
.42
.45
.42
.27
.27
.33
.18
.18
.14
.14
.11
.09
.10
.11
.09
.10
.14
.11
.09
.10
.09
.06
.06
.07
1.08
1.08
1.04
1.04
1.01
.99
1.00
1.01
.99
1.00
1.04
1.01
.99
1.08
1.19
1.16
1.16
1.17
.80
.73
.63
.61
.55
.52
.59
.63
.51
.54
.72
.60
.55
.56
.51
.38
.37
.44
.22
.19
.16
.16
.14
.13
.14
.15
.12
.13
.17
.14
.11
.12
.12
.09
.08
.10
1.12
1.09
1.06
1.06
1.04
1.03
1.04
1.05
1.02
1.03
1.07
1.04
1.01
1.11
1.22
1.19
1.18
1.20
Variable definitions:
k = bushels of grain (corn and malt) required to produce a gallon of spirits.
P c = the price of corn, $’s per bushel.
P m = the price of malt, $’s per bushel.
J = the federal tax on spirits, $’s per gallon.
P g = price of grain, $’s per bushel. Formally, P g = 1 cP c + 1 m P m, where 1 c and 1 m are the cost
shares of corn and malt. By assumption, 1 c =.95 and 1 m =.05 under the lower-bound cost
estimate; and 1 c =.6 and 1 m =.4 under the upper-bound cost estimate.
c = the after-tax cost of producing a gallon of spirits. Formally, c = k*P g + J.
Sources: IC, pp. 815-19, and 843; ; BLS (1902, pp. 446-47); United States (1900); and United
States (1938, pp. 66-67).
31
Table 2
Production, Market Share, and Yield: 1879-1900
Year ending,
March 31
1879
1880
1881
1882
1883
1884
1885
1886
1887
1888
1889
1890
1891
1892
1893
1894
1895
1896
1897
1898
1899
1900
Industry production
Alcoholic
Spirits
(1)
Distilled
Spirits
(2)
51.1
59.7
65.1
61.1
54.6
53.3
50.2
46.4
45.4
47.2
48.9
52.3
57.3
60.3
59.4
54.7
41.8
44.6
40.3
42.7
50.2
52.0
69.0
86.8
112.5
110.3
83.3
76.2
76.4
80.5
80.0
73.6
86.3
106.1
116.1
118.3
127.9
101.9
84.5
88.0
70.7
78.8
96.0
107.0
Trust production & market share
Alcoholic
Spirits
(3)
Market
Share1
(3)/(1)
Market
Share2
(3)/(2)
30.0
38.7
39.7
47.1
45.5
51.8
30.5
17.1
0.63
0.79
0.76
0.82
0.75
0.87
0.56
0.41
0.41
0.45
0.37
0.41
0.39
0.41
0.30
0.20
Note: production and output numbers are in millions of gallons.
Sources: IC, pp. 89 and 815; IRS, 1881-1898; and United States (1900, p. 32).
32
Table 3: Demand Estimates: Low-Price Regime
Variable
Quantity
ln(quantity)
Price of spirits
ln price of spirits
Price of hops
ln price of hops
Industrial production
ln industrial production
Constant
Price elasticity of demand
95% confidence interval [low,hi]
99% confidence interval [low,hi]
Implied price-cost markup
implied markup using 95% [hi]
implied markup using 99% [hi]
Observed markup using upperbound cost estimate
Observed markup using lowerbound cost estimate
No. of obs.
Adjusted-R 2
Estimation
Instruments
mean
(std dev)
3.05
(.61)
1.10
(.20)
.83
(.03)
-.19
(.04)
.15
(.01)
-1.89
(.07)
46.0
(4.02)
3.83
(.09)
...
...
...
linear
exponential
log-linear
dep.
var.
...
...
...
-15.8
(5.18)
...
dep.
var.
-5.47
(1.66)
...
dep.
var.
...
16.6
(11.9)
...
5.44
(3.82)
...
.083
(.022)
...
.028
(.007)
...
15.9
(3.61)
4.29
[1.37,7.22]
[0.32,8.27]
.30
[.16]
[.14]
3.53
(1.11)
4.54
[1.46,7.40]
[0.65,8.42]
.28
[.16]
[.13]
mean
(std dev)
[95th %tile]
mean
(std dev)
[95th %tile]
26
...
...
-4.70
(1.42)
...
.929
(.612)
...
1.28
(.330)
-.103
(.315)
4.70
[1.76,7.64]
[0.71,8.69]
.27
[.15]
[.13]
.039
(.037)
[.103]
.074
(.039)
[.150]
26
.50
2SLS
26
.53
2SLS
26
.54
2SLS
price of corn; price of malt; federal tax; 1888 dummy
note: unless otherwise indicated, variables in parentheses are standard errors.
33
Table 4: Demand Estimates: Exclusive-Dealing Regime
Variable
Quantity
ln(quantity)
Price
ln price of spirits
Price of hops
ln price of hops
Industrial production
ln industrial production
Constant
Price elasticity of demand
95% confidence interval
99% confidence interval
No. of observations
Adjusted-R 2
Estimation
Instruments
mean
(std dev)
3.15
(.73)
1.12
(.25)
.87
(.03)
-.14
(.04)
.20
(.02)
-1.64
(.07)
55.0
(7.2)
4.00
(.11)
...
...
50
...
...
linear
exponential
log-linear
dep.
var.
...
...
...
-15.2
(7.21)
...
dep.
var.
-5.56
(2.46)
...
dep.
var.
...
5.03
(4.89)
...
1.90
(1.67)
...
.05
(.01)
...
.01
(.006)
...
11.8
(3.17)
4.19
[0.19,8.20]
[0.00,9.53]
50
.12
2SLS
4.79
(2.37)
4.84
[0.54,9.14]
[0.00,10.6]
50
.10
2SLS
-4.70
(2.10)
...
.35
(.30)
...
.79
(.35)
-2.12
(1.55)
4.70
[0.48,8.92]
[0.00,10.3]
50
.13
2SLS
price of corn; price of malt; tax; 12/92-1/93 dummy
Variables in parentheses are standard errors.
34
Table 5
Demand Estimates: High-Tax Regime
Variable
Quantity
ln(quantity)
Price
ln price
Constant
Price elasticity of demand
95% confidence interval
99% confidence interval
No. of obs.
Adjusted-R 2
Estimation
mean
(std dev)
1.24
(.58)
.04
(.75)
1.03
(.01)
.03
(.01)
...
...
...
...
7
...
...
linear
exponential
log-linear
dep.
var.
...
...
...
-63.0
(18.5)
...
dep.
var.
-69.4
(21.3)
...
dep.
var.
...
66.4
(19.1)
52.3
[12.9,91.8]
[0,114.3]
7
.59
2SLS
71.8
(22.0)
71.5
[15.1,127.7]
[0,159.8]
7
.68
2SLS
Instruments
-74.4
(23.3)
2.54
(.80)
74.4
[14.4,134.3]
[0,168.3]
7
.66
2SLS
price of corn; price of malt; federal tax
Variables in parentheses are standard errors.
35