Beeronomics: Anti-Trust

The New York Times comments on the declared intention of Anheuser-Busch InBev and MillerCoors to raise prices on their beers at a time when the economy is in the tank, sales are down and more and more consumers are going for craft beer. They go on to wonder if this is going to set off any anti-trust alarms in the Obama administration. Jeff over at Beervana wonders what the companies are thinking raising prices in the face of declining market share? But economists know that it's all about price elasticity of demand. You may make more money if you give up some sales but charge more. [As an aside, the same principle is true of parking lots. People often wonder why downtown parking lots charge so high a price that they don't fill up - how can it be a profit maximizing strategy to leave unfilled spaces? - the reason comes from the fact that they charge a single price and are responding to elasticities]

Anyway, the fact that the two companies have an 80% market share is part of the economic calculations that go into anti-trust investigations, but it is not the only thing.

One of the most important concepts in anti-trust is the contestability of markets: how easy is it for a competitor to come along and compete against you? And in this the beer market is pretty contestable as shown by the rapid rise of craft breweries. In fact, the very success of craft brewing over the last decade would be exhibit number one in an anti-trust hearing - this success shows that beer is an easy market to get into and thus there is intense competition. Now most of this competition is local and the big breweries have vast economies of scale on the national level, but their ability to rise prices is severely limited by fierce competition in local markets from craft brewing.

Or course this can be seen another way, because another concept in anti-trust that factors in is how we define the market. Are macro-brews and micro-brews really in the same market and thus micros are in fact real competition for macros? (And for that matter are all alcoholic beverages actually part of a single market so that the real share of these companies is quite small?) I have wondered in this blog many times about how high is the cross-price elasticity of micro and macro beer for this very reason, for it is with this figure that we decide how close the markets are. In other words when the price of Deschutes beer rises, how big a bump in the demand for Bud is there?

I have to admit that my sense is that the AB InBev and MillerCoors could make a pretty spirited defense of their case in an anti-trust hearing. They could show how in local markets beer sales are very competitive and that the national economies of scale they enjoy are not easily leveraged in local markets to keep prices artificially high. To me, the decision to raise prices just seems like simple profit maximization - and good news for local craft brewers as it appears there will be more market share to be had.

Econ 101: Anti-Trust and the Whole Foods/Wild Oats Merger

From the Oregonian, I learned of a federal appellate court ruling that sent a decision allowing the Whole Foods/Wild Oats merger back to district court. Here is a link to the LA Times as the Oregonian website is not letting me access it - big surprise.

I thought this is a good chance to discuss a few aspects of anti-trust oversight in the United States. The basics of anti-trust in such a case is pretty clear: when firms get too much market power (have too few competitors) the profit incentive causes them to raise price and lower output which causes a loss in social welfare. Fewer consumers get to consume and those that do consume at a higher price while the firm gets excess profits.

But determining market power is often quite difficult for the simple reason that 'markets' are very hard to define and therefore 'competitors' are hard to identify. Take Whole Foods, what exactly is their market? Is it organic, gourmet and overpriced groceries. Just gourmet? Groceries full stop? Whole Foods argued that in today's market there is no longer much distinction between them and major grocery chains like Safeway because the latter also is stocking more organic and gourmet foods. So Whole Foods wanted to define the market as groceries in general and thus all the major chains are competitors, so a merger with Wild Oats is not a concern - there is plenty of competition left over. The Federal Trade Commission wasn't so sure, they argued that Whole Foods serve a distinct market - gourmet and organic foods - and thus opposed the merger. [By the way, it is very rare that these things get to court, they are usually settled between the two parties]

So who is right? Well it is pretty hard to tell. The usual course is to look at the cross-price elasticity of demand. This measure, for example, the change in demand for Whole Foods goods when Safeway changes their prices. As you can imagine trying to isolate this effect in the world of supermarkets where prices are always and constantly in flux is almost impossible. Another thing that matters is the 'contestability' of the market - how easy would it be for a new competitor to enter the market. This limits firms' ability to exploit concentration by raising prices because it would encourage the entry of new competitors. I imagine that the current state of Safeway-type stores has a pretty minimal influence on Whole Foods demand, but that is would be very easy for Safeway-type stores to ramp up their offerings to compete. In general, I would not be that worried if I were the feds.

NB: It seems a little absurd in the land of New Seasons and other such stores, but when I lived in Denver, Whole Foods and Wild Oats were the entire organic market. I used to frequent Whole Foods until my local Safeway started stocking many more organic alternatives - which is why I am a bit sanguine about the merger.