Most bars do. The markup on alcohol is absurd. As an individual, I can buy a keg of a very good beer for a cost of approximately 38 cents a pint. That same beer at a bar costs more like 4 or 5 bucks.
Cutting the margin down still covers costs considerably, but happy hours are a 'loss leader' to get you in to a bar that would otherwise be less occupied, and perhaps as a signal for those driving by looking for a 'happening' bar, which is usually done toward the end of happy hour.
There might also be motivation to get you somewhat drunk so that you'll stay after happy hour and not realize that you're paying full price for beers.
