Assuring Consumers of Authenticity, Safety, & Quality : Early American Whiskey Markets

Do markets provide adequate incentives for entrepreneurs to effectively assure consumers of authenticity, safety, and quality in the presence of asymmetric information? Early American whiskey markets, where whiskey was commonly sold out of open barrels, present a classic case of asymmetric information where markets might be expected to unravel because consumers could not readily discern the authenticity, safety, and quality of whiskey often sold out of open barrels. This was especially problematic because prominent public health experts claimed whiskey was commonly adulterated with poisonous ingredients. Despite these market features that would tend to unravel the market, early American whiskey markets were robust before the Pure Food and Drugs Act of 1906. Using archival research from digitized historical newspapers, this paper details the four mechanisms that entrepreneurs in the whiskey industry invested in to assure consumers of authenticity, safety, and quality to prevent the market from unraveling: 1) distinctive characteristics, 2) brand names, 3) exclusive local dealer agreements, and 4) sealed bottles. While distinctive characteristics and brand names were, on their own, ineffective, local dealer arrangements and sealed bottles provided the assurance necessary to prevent the market from unraveling. Entrepreneurs in the whiskey industry had the incentive to undertake these investments to help customers overcome their severe asymmetric information problems