Beeronomics: Mergers and Distribution

Now that finals have started, all the work shifts to the students and I can now start to catch up on blogging. From last week: John Foyston of The Oregonian reported on a merger of some major Oregon beer distributors.

What should we think about this merger in economic terms? Well it depends on the relative economies of scale versus the market concentration trade off. Based on Foyston's article (and I believe it) there are considerable economies of scale - fewer half-full trucks delivering to the same stores (good environmentally as well) mean average costs should fall. And, in answer to Jeff, yes, smaller distributors could suffer disproportionately from high fuel costs if they are not as able as the bigger guys to make their trucks efficient. [Think one truck visiting 10 stores in a day of the little guy versus one truck visiting 5 for the bigs] So bigger may mean cheaper. However, with market concentration comes the ability to price above marginal cost which could easily wipe out the cost savings and be captured as rents. Clearly some of this is anticipated by the firms or they would not have merged in the first place. I have no way of knowing where the balance will fall, but I do worry about concentration as there is low contestability in this market due to government regulation. [Contestablilty is how easy it is for another firm to start competing in the same market]

Here is another twist. We know from the economics of product variety that the free market tends to offer too much variety relative to what is socially optimal. But serious beer connoisseurs benefit from this tremendous variety (and casual drinkers suffer as prices are higher than with less variety - thus the sub-optimality). If only one firm controls product variety, the competitive forces that cause this excess variety will be diminished and there is every reason to believe that the variety being distributed will be diminished. This is what I think really worries the beer-heads, and right they should. It IS quite possible that the smallest brewers will be pushed out - they are more expensive to deal with and the extra variety may no longer be desired.

But it is important to realize that distributors are responders to markets just as are retail outlets. If craft beer is selling better than macro-brew, guess what they will want to stock their shelves with? So, in the end I think it is too soon to tell about the merger, but I am cautiously optimistic, after all it is the very distributors that were instrumental in creating the amazing craft beer industry in Oregon.