The effect of price advertising on prices: Evidence in the wake of 44 Liquormart

The 44 Liquormart decision, eliminating Rhode Island's ban on liquor price advertising, made Rhode Island the subject of a natural experiment for meas uring the effect of advertising on prices. Using Massachusetts prices as co ntrols, we find that advertising stores substantially cut only prices of th e products that they advertise. Prices of other products, at both advertisi ng and nonadvertising stores, do nor change. Advertising stores cut their p rices on products advertised by rivals, while nonadvertising stores do not. We find no reductions in price dispersion across stores. Newspaper-adverti sing stores appear to draw a higher share of customers after they advertise . (JEL L11, L51, L66).