WSET Diploma D2 Exercises (Other Types of Market)

Answer

Monopoly markets refer to systems where the government exclusively controls the retail sale of alcoholic beverages, including wine. These systems are most commonly found in Scandinavian countries and parts of Canada. In such markets, only government-owned stores—or in some cases, licensed specialist distributors—are legally permitted to sell alcohol to consumers, including bars and restaurants. The primary goal of a monopoly market is to limit alcohol consumption.

In monopoly markets, producers must register through an approved importer and respond to tender requests issued several times a year by the monopoly. Submitted wines are blind-tasted by a panel, and only selected wines are approved for sale. Even then, they must undergo further testing before being launched.

The advantages of monopoly markets include providing a level playing field where small and large producers can compete based on quality, and offering nationwide distribution for listed products. However, the process to market a wine can take 7–8 months and involves considerable bureaucracy. Furthermore, monopoly systems often result in higher retail prices due to heavy taxation and the absence of price competition.

Grading Criteria

• Definition
  • For stating that monopoly markets are systems where the government controls the retail sale of alcoholic beverages, you get 1 point.
  • For noting that such systems are found in Scandinavian countries and parts of Canada, you get 1 point.
  • For explaining that only state-owned or licensed stores can sell alcohol to consumers, including bars and restaurants, you get 1 point.
  • For mentioning that the main purpose is to control or reduce alcohol consumption, you get 1 point.
  • For stating that producers must register through an approved importer, you get 1 point.
  • For describing the tender process and blind tasting by a panel, followed by further testing before launch, you get 1 point.
• Advantages
  • For explaining that the system levels the playing field for small and large producers, you get 1 point.
  • For stating that selected wines benefit from nationwide distribution, you get 1 point.
• Disadvantages
  • For stating that the approval process is time-consuming (7–8 months), you get 1 point.
  • For mentioning bureaucratic complexity, you get 1 point.
  • For explaining that high taxation and lack of competition raise retail prices, you get 1 point.

Answer

The USA’s Three-Tier System is a regulatory structure established after the repeal of Prohibition in 1933. Its purpose is to prevent monopolies, promote accountability, and ensure the proper taxation of alcohol. The system separates the alcohol supply chain into three independent tiers: suppliers (producers and importers), distributors (wholesalers and brokers), and retailers (e.g., supermarkets, wine shops, bars, and restaurants). Cross-ownership between tiers is generally prohibited.

One of the main advantages of the Three-Tier System is that it generates significant tax revenue, as each tier is independently taxed. Additionally, the existence of a distributor tier contributes to logistical efficiency—major distributors have the infrastructure to cover wide regions across the country. They also provide trained sales teams and marketing support, saving producers the substantial time, effort, and cost required to build such capabilities on their own.

However, there are notable disadvantages. The number of distributors has declined significantly over the past two decades, leading to market consolidation. As a result, small and mid-sized producers often struggle to get representation and risk being overshadowed in large distributor portfolios. In many states, franchise laws make it difficult for producers to switch distributors, even if the distributor underperforms. Furthermore, each state has its own complex regulatory framework, which raises compliance costs and complicates market access for producers. Due to these challenges, many small wineries are turning to direct-to-consumer (DTC) models, such as online shipping and cellar door sales.

Grading Criteria

• Definition
  • For stating that the Three-Tier System is a regulatory framework established post-Prohibition in 1933, you get 1 point.
  • For explaining that its goals include preventing monopolies, ensuring accountability, and enabling taxation, you get 1 point.
  • For naming the three tiers: suppliers, distributors, and retailers, you get 1 point.
  • For stating that cross-ownership between tiers is prohibited, you get 1 point.
• Advantages
  • For explaining that each tier being separately taxed leads to high tax revenue generation, you get 1 point.
  • For stating that distributors provide national logistical coverage, you get 1 point.
  • For mentioning that distributors supply sales and marketing support, you get 1 point.
  • For explaining that this reduces producer burden, you get 1 point.
• Disadvantages
  • For stating that consolidation of distributors has limited access for small/mid-sized producers, you get 1 point.
  • For noting that producers may get lost in large distributor portfolios, reducing visibility, you get 1 point.
  • For explaining that franchise laws restrict switching distributors, even in underperformance cases, you get 1 point.
  • For identifying that each state has different regulations, creating high compliance costs, you get 1 point.
  • For stating that these challenges have led many producers to turn to direct-to-consumer (DTC) models (e.g., online/cellar door), you get 1 point.

Answer

Control States: In control states, the government plays a direct role in one or more tiers of the three-tier system. Typically, the state holds a monopoly over the distribution or retail of alcohol, especially for spirits, and sometimes for wine. For example, in Pennsylvania, all spirits must be sold through state-run stores. There are 17 control states currently in the USA.

Open States: Open states have minimal government involvement in the three-tier system. Suppliers and distributors operate independently and are free to form and terminate distribution agreements. This system encourages competition, market flexibility, and more consumer options. However, it can also lead to instability for distributors, as suppliers may abruptly change partnerships, potentially causing financial harm.

Franchise States: Franchise states have strict laws that protect distributors by making it very difficult for suppliers to terminate contracts. Once a distributor is appointed, the relationship is nearly permanent unless both parties agree to end it. These laws provide stability and prevent sudden market disruptions. However, they can disadvantage suppliers, especially smaller producers, who may be locked into poor-performing distributor relationships with limited options for change.

Grading Criteria

• Control States
  • For identifying that in Control States, the government participates directly in one or more tiers, you get 1 point.
  • For stating that distribution or retail, especially of spirits and sometimes wine, is state-controlled, you get 1 point.
  • For giving an example such as Pennsylvania requiring spirits to be sold through state-run stores, you get 1 point.
  • For noting that there are 17 Control States in the USA, you get 1 point.
• Open States
  • For identifying that Open States have minimal government involvement in the system, you get 1 point.
  • For explaining that suppliers and distributors operate independently, with freedom to form/terminate contracts, you get 1 point.
  • For stating that this promotes market flexibility, competition, and more consumer choice, you get 1 point.
  • For mentioning the risk of instability for distributors, such as abrupt contract changes, you get 1 point.
  • For recognizing that financial harm can occur to distributors when partnerships end unexpectedly, you get 1 point.
• Franchise States
  • For identifying that Franchise States have strict laws protecting distributors, you get 1 point.
  • For stating that distributor relationships are difficult to terminate unless mutually agreed, you get 1 point.
  • For explaining that this provides market stability and prevents disruptions, you get 1 point.
  • For mentioning that this system may disadvantage suppliers, especially smaller producers, you get 1 point.
  • For noting that suppliers may be locked into underperforming partnerships, limiting flexibility, you get 1 point.