Beeronomics: When Competition is Good for All

[Note: this is a rare cross-post with the Beeronomics blog as it really is economics first, I post it here as well]

This is something I have discussed before in these (what, pages? files? screens?), er in this blog, but is illustrated nicely in this interview Andy Crouch, the Beer Scribe conducted with Alan Pugsley of Shipyard brewing company in Portland, Maine.

AC How has [the craft beer market] changed to now?

AP It's completely changed. The bigger market for craft beer exists now, obviously. The craft beer market since those days has grown every single year.The craft brewing segment of the market is not going away. Back when Geary's started, Sam Adams was just starting. Even though it really wasn't a microbrewery as such, it was a contract brewing operation where all the money raised went into marketing. Jim Koch is a very good marketer. He did a great job in getting it out there and turned it into a multi-million dollar brewery. So that brand in itself helped pull others with it. All of his marketing money was not only making people aware of the Sam Adams brand, it was making them aware there was something outside of Budweiser. And that's really what he did. Even though we're competitors, at the end of the day, you say 'well done' and if you're honest, you say 'thank you for doing it that way'. It certainly did help.

AC After outgrowing the Federal Jack's location, you opened a package operation called Shipyard Brewing Company in Portland, Maine, in 1994. What was the result of this move?

AP The odd thing is that as opposed to taking away from Geary's sales, it actually increased them. The reason being there was one little face of Maine-made beer on the shelf which was easy to miss. When you put Export Ale here and Geary's Pale Ale here, all of sudden you've got a billboard. If you look in the supermarkets today, you've got Shipyard with three or four shelves and Geary's with three or four shelves and that's how you sell beer. Ironically, our growth and establishment helped Geary's. Plus, I think it gave them a little bit of a kick in the pants and realized they had some competition. They realized they needed to do something else and that's when they came out with Hampshire Special Ale. [emphasis mine]

Normally when we talk about competition we are talking about the number of firms that serve a given market that has a fixed (static) demand curve.  In most standard models of imperfect competition, increases in competition are good for consumers (more get to purchase at a lower price) and bad for firms (they have to accept lower prices).  But things change when demand it itself a function of the number of firms.  In this case more competition does two things, it has the traditional role of adding to the competition for existing customers, but it also increases the number of customers as well.  How this tension is resolved determines how an establish firm should feel about a newcomer.

Relations between craft brewers, in my experience, is exceptional - it is a very chummy industry.  This, to me, suggests that the tension right now is being resolved in favor of new firms.  Anecdotally, this seems largely true: new craft beer companies are finding new markets and virgin territory, pushing their way into venues that have heretofore been strictly macro-brew, creating even more shelf space in supermarkets as the number of craft beer drinkers continues to increase.

I think Portland, Oregon is an interesting laboratory for this: it is hard to imagine being a beer drinker that moves to Portland and isn't moved by the omni-present craft beer scene to give craft beer a fair hearing.  Many will decide they not only like craft beer, but that craft beer transforms their beer drinking experience into a adventurous experience that provokes thought, discussion and passion.

There will come a time (and we may be quickly reaching it in Oregon) when the growth of breweries outpaces the growth of craft beer demand and competition becomes more serious among craft brewers, but for the time being, I think the attitude that all breweries are rowing the same boat in the same direction is accurate.

Beeronomics: The Blog

UPDATE: I have added a box to the right that will list the most current five blog posts from Beeronomics, all you have to do is click!  I think this should solve the problem for OEB readers who like the beery stuff as well.

As of today I am going to change the way I operate when it comes to beeronomics.  A while back I created the Beeronomics blog simply as a place to compile the beeronomics posts that appeared in The Oregon Economics Blog because I was finding that I had two audiences: people interested in beer and the intersection with economics and people interested in economics and the intersection with Oregon and Oregon's policy issues.  The Beeronomics blog was a way for beer enthusiasts to read beer posts without having to endure all the other economics and Oregon stuff.  Though many of my OEB readers like the beery stuff as well, I know many others don't care one wit about it.

So, starting today, I shall relegate my beer posts to the Beeronomics blog.  When I post anything with true economics content I shall cross-post on the OEB so you won't miss out on the true beeronomics content if you just stick with the OEB.  But I shall also post other stuff on Beeronomics that might not have a high level of economics content and for that you shall have to navigate over.  I will keep a link to the each blog on the top of the main page.

Though this seems obvious, it was not an easy decision.  I like the fact that blogs reflect the personality of the authors.  Unlike straight-laced journalism or academic papers, blogs allow people like me a chance to express themselves and relegating the beery stuff to a separate blog diminishes a little bit of my personality in the OEB.  I also started blogging as a way to talk more informally with students, share my enthusiasm for economics and demonstrate how economic thinking can be applied everywhere.  In fact that was the genesis of beeronomics in the first place.  There is nothing particularly special about beer except that it is a hobby of mine and a fun place to apply economics. I try to engage my students and encourage them to apply economics to what they know and love.  But it is hard to be a serious commentator on Oregon policy and write about a great beer you should try so I shall do so separately in the future.

There are separate twitter feeds as well, so you can subscribe to Beeronomics, The OEB or both.  And yes, this does take a little more work so if I find that it is taking too much time, I may just go back to a single blog.

Beeronomics: Middle Class Spending on Alcohol is Down

The Wall Street Journal reports on data from the Consumer Expenditures Survey that show that average spending on alcohol for those in the middle income quintile fell more than 20 percent last year.  But is this bad or good news for beer?   As the article points out this does not mean that they are consuming any less alcohol, they may instead be switching to lower coast alternatives.  They may be moving from whiskey to beer for example or from expensive whiskey to less expensive whiskey.  It all gets back to whether beer (and especially craft beer) is a normal good or an 'inferior' good.  Don't get mad beer lovers, inferior is simply a term of art in economics for a good which you consume more of when income declines.  Just like how you might switch to hamburger and away from sirloin as incomes decline, you might drink less single malt and more craft beer.

Anyway, looking at the beer statistics it is imports that are suffering which I think is more of a symptom of the growing domestic craft beer awareness.  For a while it used to be if you wanted good beer you almost had to go import, but no more.

Interestingly, the wealthy spent more on alcohol during this same period.  There is some sort of joke in here about using alcohol to assuage the guilt of rising income inequality but I am not going to make it.

Beeronomics: Two Fall Beer Events Worth Attending

Well, perhaps they are all worth attending, but these are two happening this weekend that are worth extra attention.

Celebration of Beer Weekend at Skamania Lodge

Look at the picture above (and Jeff's from last year) and you immediately understand the appeal of this event.  This mix of stunning setting, great beer and good food looks a real treat and I will be attending this for the first time this year and am looking forward to it.

It is a great mix of Washington and Oregon Breweries and includes some can't miss names - Double Mountain, Fish, Full Sail - and some I have yet to sample, like Lazy Boy and Salmon Creek.  There is also a beer battered and beer boiled seafood buffet on Saturday night and a kegs and eggs buffet on Sunday morning.  And if you are really brave, you can try teeing off in the golf challenge with some brewer/duffers.  

Fresh Hop Tastival at Oaks Park

This one was clearly made for me.  I love the fresh hop beers, warts and all, because they feel just that: fresh.  And I live a short (and very pleasant) walk to Oaks Park through the wonderful Oaks Bottom Wildlife Refuge. I plan to attend.

There are few moments when beer feels particularly connected to the land - unlike wine which always feels that way - and fresh hop beer is one of them (seasonal fruit infusions are the other in my opinion).  This festival allows you to sample many variants of fresh hops used in all the different beers.  The one I am most pining for is this years Double Mountain Killer Green which uses Brewer's Gold hops.  Other beers to watch out for?  Jeff at Beervana has had the new Deschutes Hop Trip and finds it 'tasty.'  And John Harris never fails to create some fresh hop magic. I believe Harris is a proponent of the theory of using dried hops at the beginning of the boil to lay down a base of bitterness that is easier to control and then fresh hops at the end for aroma and flavor, you can try and see if you can detect beer made thusly versus all fresh hops.  

But wait, you say, how can you do both?  Fortunately, there is a Tastival preview on Friday night.  The intrepid craft beer enthusiast will not be stopped! 

So where is the economics?  Easy: beers are complementary to each other, to food, to beautiful settings and to good company.  Thus enjoying them together increases the satisfaction I get from consumption, making such festivals and events a deal.  Plus, contrary to appearances, I don't actually drink that much beer, but I do love to try new ones - so these festivals with little sampler tastes are ideal for this enthusiast. 

Beeronomics: Information Economics and Organic Beer

In economics information plays a pivotal role in the efficiency of markets.  One of the assumptions that underlies the result that free markets are Pareto efficient (i.e. maximize total welfare surplus) is that there is full and complete information.  What this means in a product market (among other things) is that consumers know everything there is about a product and can therefore value it appropriately before you buy.  I have blogged about this in terms of beer - highlighting the fact that with a new beer you don't really know until you try how much you value a particular brew.   But this general principle applies in many areas, you might value locally sourced ingredients and be willing to pay more for them at a farmers market for instance, or you might prefer to buy milk from cows that are not given growth hormones.  But you don't know unless you are told whether produce is local or milk is BGH free.  [And by the way this has nothing to do with whether milk from BGH free cows is better or healthier, only if consumers value it differently - but presumably consumers value it differently because they believe there is a difference or some positive probability that there is a difference]

So suppose you value products that are Organic and therefore decide to buy a Deschutes Green Lakes Organic Ale.  This is a beer that is considered organic per the USDAs guidelines.  Ah but wait, it turns out that it is only the malted barley that is grown organically, the hops, according to current USDA rules are allowed to be used in non-organic form in an organic beer (apparently one of only three whole crops thus allowed).   Jeff at Beervana has a nice follow-up blog post explaining the organic rules and the exception.  The justification for this exception for hops is that there are currently too few organic hops being grown (apparently they are very difficult to grow 100% organically).  The irony is that a main reason there are so few hops grown organically probably has a lot to do with the exception itself.  If you can call a beer organic that uses non-organic hops, there is little reason to try and get organic hops and little reason to try and grow them.

Business wise, this is frustrating to organic hop growers - a USDA ruling ending the hops exception would be huge, it would instantaneously create a massive demand.  Economically speaking, the exception creates a market failure for the reasons I mention above.  I am a pretty enthusiastic craft beer enthusiast and until I read Jeff's post I had no idea of the hops exception so I am willing to bet that most consumers don't know either.  This means they cannot accurately value the beer they buy and a sub-optional market outcome results.

Brewer Matt Swihart of Double Mountain commented on Jeff's post and added that:

In terms of ethicality, I've always felt it disingenuous to label a beer 100% organic when made with conventional hops. It is misleading the consumer as hops are grown under substantial pest pressure while barley is a reasonable "soft" crop to grow in that conventional farming of barley requires very little pesticide and nitrogen use. Organic barley and conventional barley have very similar environmental footprints...

So it is possible that it is really hops that matter when consumers are looking for and choosing to buy 'organic beer.' [As an aside, consumers might like organic because they like the idea of limiting chemical applications in the environment, in which case Matt's analysis is correct, or they might like it because they think it is a healthier alternative, in which case I am not so sure as hop vines might be treated before they flower and thus the flower itself might not have any chemical residue whereas barley might retain the residue.  Anyone know?]

Now there is a way forward without the USDA.  If brewers started using organic hops and labeling their beer as 'made with all-organic barley and hops' this might start to alert consumers to the difference and might spur demand for organic hops. As an economist there are few things as universal as the fact that more information is better for the efficiency of markets, so I support any effort to provide more accurate information about all goods.

As a parting note, Matt also points out that:    

"...brewing is carbon positive. Growing the hops and barley for beer produce more carbon than consumed in the production of the crops and the beverage. What a beautiful thing. Save the planet! drink a beer!"

I don't know if Matt is including transportation and refrigeration in this, but who cares? It id another good reason to have a beer.  And by the way, if you haven't had Double Mountain beer - what the heck is wrong with you?  Matt's beers are sublimely crafted and his commitment to the highest quality ingredients is evident in the beer.  Go find some.

Beeronomics: Growing Your Own - the FInal Hop Update

Well fresh hop season is upon us, time for the wonderfully fecund crop of volatile beers - good and bad - made from fresh (as opposed to dried) hops. I have only had Oakshire's so far, so I gotta get moving. But my dream of making my own from my home-grown hops has been shattered by my failings as a horticulturalist. My problem stems from my assumption that any growing vine must be
as hearty as a weed and thus not in need of any special attention. Ur...no.

My real problem was poor soil and so after growing quickly to about a foot, it just stopped. I was patient, but eventually realized it was a failure to thrive and needing of nutrients. Massive doses of compost restarted it and obsessive watering and tending got it moving but too late. It has now stalled out at about 8 feet and no flowers.

The picture above is my best attempt at pretending it is a towering plant. I was told not to expect much of a harvest the first year, but I had hoped for some flowers. Alas.

Speaking of growing your own, I finally had a Chatoe Rogue Single Malt Ale made entirely of Rogue's own home-grown barley and hops.  As it only uses one type of malt and one type of hops I didn't expect much - brewers love to blend lots of ingredients generally.  But I was surprised to find that it was a delightful beer: simple, straightforward and very quaffable.  I highly recommend it both as a pean to the local food movement, but also as a great beer in its own right.  And Rogue apparently knows a lot more about growing hops than do I.

As far as fresh hop ales go, I am looking forward to trying Rogues, as well as the standard setting Full Sail Lupulin and Double Mountains Killer Green.

If you want to know where to find fresh hop beers in Portland, use Bill's Fresh Hop Map and contribute when you find an undiscovered one.  

Beeronomics: Beer Stimulus

"While Japan and the U.S. think up new ways to combat risks of deflation, Germany is banking on its own 200-year-old solution: Beer. Lots of beer."

So begins Brian Blackstone's Wall Street Journal article on the economic impact of Octoberfest in Germany.

Saturday marks the start of the 17-day celebration of Munich’s Bicentennial Oktoberfest (though it has been canceled 24 times in the last two centuries for disease and wars). It’s a boon for the city: by UniCredit economist Alexander Koch’s count it adds about one billion euros to Munich’s economy, or roughly 2% of its GDP via money spent on beer, food, shopping, hotels and transportation.

Last year, over 6.6 million liters of beer were sold (and presumably consumed) at Munich’s Oktoberfest. That was in the early days of Germany’s recovery from a severe recession, and consumption was up smartly from 2008, though still considerably below 2007’s record of nearly seven million liters.

The research on which this article is based is from UniCredit and is a good read.

And they are pretty excited about the pro-inflationary effects of beer as well:

But wait, inflation is bad right?  Well, actually a little inflation (2 to 3 percent) is a sign of a healthy economy and Germany's current one percent rate is a little too low.

Ah the wonders of beer, and it tastes good too!

Beeronomics and Economist's Notebook: Does Drinking in College Hurt Performance?

I figured I'd put this in the Beeronomics sphere as well as the Economist's Notebook as beer is one of the beverages of choice among collegge students: A new NBER paper [HT: Freakonomics] reports that drinking in college impairs performance.  From the abstract:

This paper examines the effect of alcohol consumption on student achievement. To do so, we exploit the discontinuity in drinking at age 21 at a college in which the minimum legal drinking age is strictly enforced. We find that drinking causes significant reductions in academic performance, particularly for the highest-performing students. This suggests that the negative consequences of alcohol consumption extend beyond the narrow segment of the population at risk of more severe, low-frequency, outcomes.

Uh oh. This should come as no surprise to anyone who has ever been, or been exposed to, college students: students drinking alcohol is common and the effects of alcohol (as most college students will tell you) impedes their academic performance.

But look more closely at the abstract to understand just what it is the authors are doing in this paper, and the actual story becomes less less clear.  The authors took data from the US Air Force Academy where underage drinking is not tolerated and can lead to immediate expulsion and compared the performance of students just before their 21st birthdays and the performance of students just after their 21st birthdays.

So it is not the alcohol itself the authors are isolating, but the entire change in lifestyle and time management that happens when students turn 21. The authors claim that the USAFA data are a source of strength, but I actually see it as a major weakness.  With such a tightly controlled campus, 21st birthdays may traditionally be a moment of liberation, not just to drink alcohol but to become more social off campus and perhaps less serious on campus.  Now, I imagine that they have a control group for comparison of students who didn't drink prior to age 21 and who don't drink after turning 21, but this is not really a counterfactual because not drinking may also signal a rejection of the entire post-21 lifestyle of which I speak.  [I don't have access to NBER working papers through OSU]

This is just another problem of identifying causality that always happens with social data: is it the alcohol that impedes performance or the behaviors correlated with alcohol?  I suspect both.

Another point is that students are maximizing utility functions that include academic performance, social performance and just plain fun.  Many students recognize the tradeoffs inherent in drinking, and in socializing in general, with academic performance and make their own decisions about where their optimum point lies.  The question then is do they accurately estimate the effect of alcohol consumption on academic performance or do they not understand the deleterious effects?  If the former, than there is nothing to say unless there are significant social costs. If the latter, than we need to understand these effects and transmit the knowledge to students. Unfortunately, I don't think this paper does this.

Finally, the other important question is if there really are significant social costs.  Underage drinking has many by the way, which is why we prohibit it, but I am talking here only of the effect on academic performance.  Well, there are social returns to education so if alcohol impairs individual performance, it should also have a social impact as well, as a less well educated population is less productive.  But how significant are these costs is an important question and one we don't have the answer to.

So it is an important research agenda, but a tough causal link to uncover.  

Beeronomics: Nanobrewing

Nanobrewing is a hot topic around Stumptown these days.  For lack of an official definition I shall define it as brewing commercially on a very small brewing system (less than 3bbl, say).  Here are two examples of recent write ups on nanobrewing from Angelo at Brewpublic and Jeff at Beervana (and yes, I am going with the one word rather than nano brewing which should at least have a hyphen everyone!).  And it makes sense that it is: there are a large number of homebrewers and beer enthusiasts in the city (and the world for that matter) most of whom, at some point, have had dreams of starting their own business in brewing.

But commercial brewing is a capital intensive business and it is hard to get started without a pretty big wad of cash, even a relatively small 10bbl brewhouse can cost around $150,000 and that's before all the costs associated with installation.  So it makes sense that nanobrewing is appealing.

The economics of brewing are unchanged however and the per-unit costs of brewing on a nano system are very high.  To be a bit pedantic, the average cost per unit of a product is total cost (TC) divided by output (Q).  In brewing, total cost is made up of both variable and fixed costs.  The variable costs (VC) are costs that depend on output - the more beer you make the more labor, ingredients and energy you use.  Fixed costs (FC) are the costs that don't change as output changes - the cost of the brewing equipment and the building (unless you reach your present capacity and need to expand).

So TC = FC + VC.  ATC, which is basically your per ounce cost of beer.  Note that ATC=TC/Q which means that ATC= FC/Q + VC/Q.  In the second term on the left, both the numerator and the denominator are increasing in output so this can either rise or fall with Q (for argument's sake lets call it constant), but the first term ALWAYS falls with Q.  Voilá, this then is an increasing returns to scale industry.  Increasing output will ALWAYS  end up lowering your cost of beer.

Now the reality is that AVC can rise as well, especially when you get really really big.  It gets harder and harder to manage large enterprises, supply chains, etc.  My colleague Vic Tremblay has estimated though that the economies of scale are only exhausted at 2.5 million barrels a year, which is massive.  So the basic economics are undeniable - bigger is cheaper in brewing.

So where does that leave nanobrewing? Basically as a foot in the door.  If there is intense enough local demand for craft beer and enough beer nuts out there who will go off in search of nanobrews, some local bottle shops and pubs that will serve nanobrews, and a robust enough demand to be able to charge premium prices, then I suppose it can be a way to try and build up some funds to pay for future expansion.  If any place does, Portland certainly meets the above criterion.  I mean a city that can support Alan Sprints' passion for 17 years could certainly support a nanobrewery or three. But I agree with Jeff, nanobreweries are just a stepping stone - even those who think they will remain small, will soon find the tide of economic forces carrying them along.

But the good news is that very little has to be ventured so that even if it is lost, not much damage will be done.  And the local market for craft beer, already an embarrassment of riches, may get even more interesting.

Beeronomics: China Rising

Via John Foyston, The Economist reports on China becoming the world's biggest beer market and it is growing fast at a clip of 10% a year.  Now the Northwest breweries just need to get them hooked on craft beer.

Beeronomics: iPad Tap

Beeronomics: Consolidation, Eh?

Via Beervana I learn about the purchase of Pyramid and MacTarnahans by Labatt.

Nothing much to add to my previous post about this type of consolidation when Widhook announced the purchase of Kona: it is all about the economies of scale.

Now, when I used to spend my summers with the Canadian side of my family outside of Smiths Falls, Ontario, there were no two ways about it: you were either Molson people or Labatt people.  My family were Molson people.  So I guess I will continue to not purchase Macs and Pyramid.

Apparently there is no plan to change the current breweries. This is startlingly similar to the previous era of big brewery consolidation whereby popular regional brands were snapped up by big breweries with national ambitions.  Interesting to see it all happen again.  It is also a good example of what economics is all about relative to business.  Economics is all about understanding the fundamental forces behind market interactions.

Beeronomics: Washington's Initiative I-1100

On BI with the moms - she is doing better, thanks for all your well wishes - so I'll free ride on Jacob Grier and his take on Washington's initiative I-1100, which would, as I understand it, essentially do away with their version of the OLCC, or at least the part that controls sales.  Washington's craft brewers have come out against it, apparently because it would allow for market based wholesale pricing.  Here is Jacob:

At issue is a section of the initiative that would allow breweries to self-distribute and offer discounts to bulk buyers like Costco, grocery stores, and bars. Beer in Washington must currently sell at a uniform wholesale price: Costco pays the same amount for crates of it that a small retailer pays for a few cases. As a result, beer prices at large retailers are higher now than they will be if I-1100 passes.

Eliminating the uniform price requirement might make it harder for craft breweries to compete with the big beer companies who can offer greater discounts and benefits. Does this make the initiative anti-consumer? Only if you look exclusively at craft beer drinkers. Craft beers currently make up about 7% of the US market (probably somewhat higher in beer savvy Washington). The vast majority of beer consumers will benefit from being able to buy macrobrews at lower prices.

To put this another way, the Washington Brewers Guild is saying that the state should keep beer prices artificially high for 93% of the beer market in order to maintain the same broad selection for the remaining 7% (or whatever the actual figures are in Washington).

Personally, I doubt that the results will be as bleak as the WSG predicts. Craft brews are growing in popularity while macros are declining, and that’s unlikely to change. Smaller breweries are also starting to merge, operating independently while taking advantage of economies of scale. There may be some closures — this is true regardless of I-1100 — but craft beers don’t show any sign of going away.

My take on this part of the issue is that craft brewers' market has always been fairly distinct from macros, so they shouldn't start worrying about craft beer being more expensive, it always has.  Lower prices will allow them to grow their markets, in fact I think in Oregon at least, Ninkasi is being sold in Costco -something that will give them exposure to a whole new set of consumers.  The point is, if craft brewers have a superior product, they shouldn't be relying on arcane laws to be competitive.  Last time I looked, the craft beer industry in California, which has about the most liberal laws in the nation, was thriving.  In fact the modern craft beer industry started in California.  Craft brewers in Washington are making a mistake in aligning against consumer friendly reforms.  As Jacob says, it is about the consumer.

Beeronomics: Craft Brewers Alliance Buying Kona

The Portland Business Journal is reporting that the Craft Brewers Alliance (Read: Widmer/Redhook) is buying Kona Brewing Company.  Interesting.

This type of consolidation is not unexpected given the economics of the beer industry (read: economies of scale).  The economies are both internal to firms (brewhouse volume) and external to firms (distribution and marketing).  Obviously CBA believes that the latter will help both companies.  But is not just external economies.  Kona has made pretty amazing inroads in the mainland beer markets, and they do so by the way by contracting with US brewers to brew their beer and, you guessed it, Widmer is the contract brewer (and the Redhook facility is Portsmouth, NH is the other apparently).  So both internal and external economies of scale are huge drivers of the economics of beer and will continue to shape the craft brewing industry.

Which is why I anticipate the continued shake out of the industry.  Small packaging breweries are going to be constantly faced with pressure to expand or die.  It is just economics.  So I think you'll see that the only small brewers that remain are the brewpubs - who can package as well but it is the pub itself provides the stability.

Should be an interesting decade.

Beeronomics: Econ 101 - The Cost of OBF Beer

By the way, as an aside, with my little rumination on the price of a token at the OBF remaining the same for eons, it occurs to me to point out that while the price may not have risen for beer the cost certainly has.

To phrase this as a question for my students and other economics groupies: the buzz tent aside, all of the beer require one token a pour, so do all of the beers cost the same?  Answer: no.

To see why you have to think like an economist.  In economics the true cost of something includes the opportunity costs, what you have to forego to get it.  Well, at the OBF some popular beer have long lines while for others you can walk right on up. Thus the costs are different - the more popular beers cost more because you have to wait longer, thereby foregoing the opportunity to chat with friends and the like.

So when I say the price of the tokens has not changed, that is not the same as saying the cost has not gone up - it has, in the form of bigger crowds and longer waits.

Class dismissed.

Beeronomics: The Oregon Brewers Festival

I got back from my little vacation just in time to fulfill my annual obligation to meet up with old Lewis & Clark College buddies at the OBF.  We bumped our little rondez-vous up to Thursday this year as it has gotten so popular that even meeting on Friday at the Noon opening exposes us to uncomfortably large crowds.  Fortunately Thursday is still reasonable and the weather yesterday couldn't have been more delightful.

But this raises the question in my mind (and in the mind of my fellow economics major): why after all these years is the price essentially the same as it ever was - or in real terms even cheaper? Put another way, why don't they double the prices and start to limit the crowds?  This suggestion was met immediately with derision form our humanities major friends who considered the suggestion elitist and just the sort of crap you could expect from economists.  I suspect that the answer is in the objective function of the OBF organizers.  The festival is supposed to be a showpiece for craft beer and the more people they can expose the better.  They want the festival as big as can be.  For those of us who dislike crowds fortunately there is still Thursday, which is reasonable in terms of population.  I shall get nowhere near the festival today or this weekend.

But you should: there are some great beers to be sampled.  I particularly liked Boundary Bay's German Tradition Double Dry Hopped Pale Ale.  It was excellent and the German Tradition hops interesting if a little astringent.  This year's Collaborator Pilsner is a real winner and will be an excellent choice for the weekend which is supposed to get hot.  Green Flash's LeFreak is interesting and great - hoppy Belgian.  FInally for you hop heads look no farther than THE HOPOPOTAMUS inspired Hop Valley Alpha Centuri Binary IPA.  Er, what were those hops again?  Ah yes, Simcoe, Cascade, Amarillo - a coincidence? I think not.  And I have become a huge fan of Kolsch, especially on hot summer days, so if you are looking for a refreshing beer in the 90-something degree heat try the Three Creeks Creekside Kolsch.  You will not be disappointed.

Oh and for the love of all that is good and true: avoid the Three Skulls Hop The Plank IPA, it is horrible.

Sadly THE HOPOPOTAMUS was not invited, but based on the AGs recent interpretation of the homebrew law, the OLCC would have banned its consumption anyway.

Anyway, go, have fun and explore good beers.  One obvious trend that mimics the local scene is the rise of Belgian styles, so this is a great opportunity to get to know those as well as the traditional hop forward styles we Northwesterners love.

Oh and check out all of the banners flying in the tents.  These things are getting seriously old now and there are as many defunct breweries represented as thriving ones.  Which just goes to my point about the inherently turbulent nature of the business.

Beeronomics: For Great Northwest IPAs

I am in full vacation mode again for a few days while relatives are visiting, so I leave you with this bit of eye candy.  This is from a great NW IPA - off contest that I held with some friends.  They are, in L-R order, Ft. George Vortex, Pelican's IPA, Bear Republic Racer 5 and Ninkasi's Total Domination IPA.  Not pictured: THE HOPOPOTAMUS, which was there in a bottle but never got opened.

The Ft. George was in a growler that was by then two days old, so it was not at its freshest peak so it was at a disadvantage, but it was clearly the most fecund: it smells, tastes and feels alive and all in the best possible senses. Racer 5 is probably the other beer that has that floral essence infused and it is no accident that these two are the two unfiltered beers.  Both Pelican and Ninkasi are cleaner in that sense, a crisper mouthfeel and taste.  What I find remarkable about the Total Domination is the balance between crispness, flavor and nose. It was my pick when pressed - it is a phenomenal beer.  But the really good news is that you don't have to pick and you can let your love of variety (a general assumption in economics about peoples preferences, by the way) carry you away to the far reaches of the beer cooler in the market.

When I demanded that they pick one, the others found it hard to choose a favorite as well, especially since, after a few sips of each, all subtlety is lost - you palate has been nuked.  Since the Vortex was slightly stale, the other winners were Racer 5 and Ninkasi, but the Racer 5 pick was thought to be for Pelican (see below).  We all agreed that you cannot go wrong with any of these.  In fact, they were picked because they represent my very favorite beers over all.  I wanted to add a Hair of the Dog Blue Dot to this flight, but alas it is not in season (oh please, Alan Sprints, make this a year round beer!) and I would have added Double Mountain's IRA, but they do not bottle and I had been in Astoria not Hood River.  So I recommend any of these without reservation and since Ft. George is not available in a bottle, get it when you can.  Double Mountain is easy to find in Portland, but for some reason the IRA is not - always with the Hop Lava.  That's what a cute name buys you, I guess.

Oh and, by the way, we started this as a blind test but we all found it easy to tell which was which.  Almost immediately there was a consensus.  Except for one problem, we all mixed up the Pelican with the Racer 5.  Which, in retrospect, is embarrassing - they don't seem alike at all, especially the way they look.

THE HOPOPOTAMUS would have stood up pretty well against these beers but I decided not to add it as I wanted to keep it a fair fight.  We did later crack my latest attempt at a NW Best Bitter.  Which is getting there but still a work in progress.  I switched to Whitbread Ale yeast and got some surprising results.

Anyway, got to go entertain the in-laws.  Have a great weekend - pick up one of these beer and let me know what you think.

Beeronomics and Economist's Notebook: Creative Destruction, Shut-Down Conditions and Roots

Word that Roots Brewing was in trouble has been passed around for quite some time now, and recently John Foyston reported on the fact that Roots was up for sale, but it was still a bit of a shock (and quite sad) to get the word that Roots was closed for good.

But while the beer enthusiast in me is saddened, the economist in me sees this as (curiously perhaps) a sign of a very healthy beer economy in Portland.  A few weeks ago I attended Greenlight Greater Portland's annual Economic Summit and, while talking to Joe Cortright, Rich Read of The Oregonian came up and we were talking about the economy and small businesses. I was quoted as saying that it doesn't bother me to see many start-ups fail and what I meant by that is that in a healthy competitive economy many new ideas will be tried, will try to find markets and will not succeed because of other better ideas or more well-run businesses. The key is that new businesses are tried - and in a healthy marketplace only the best ones will survive.  Survival of the fittest if you will, but in economics we call this process of new and better ideas and businesses taking the place of established ones as 'creative destruction' and we view it as a good thing. [The term was popularized, though not coined, by Joseph Schumpeter] In Portland it is quite shocking to get bad food or bad service in a restaurant because there are so many great ones out there that if you don't do it very well, you won't last.  This is a good thing.  What would be bad is if we didn't see this dynamic and mediocre businesses succeeded.

Let me say straight out that Roots problems were not with the beer itself, which was fantastic, but with other aspects of the business.  My own history with Roots is troubled: the only two times I went to the pub with the intent to get a meal at lunch, I found the pub closed when it was supposed to be open.  I have bought their beer in the bottle many times, but I was one of the customers that got a bottle that shouldn't have been on the shelf, it was, quite simply, bad.  Complaints of bad service at the brewpub abound and with so many great choices for brewpubs around town, it is not hard to see why Roots quickly found itself in trouble. The point is it probably wouldn't have been in trouble in an economy in which there was not much brewing going on, so what the closure of Roots symbolizes is that, regardless of how wonderful the beer was, there is so much other wonderful beer being produced and served in Portland.  Long live Beervana, indeed.

The other thing that Roots' demise made me think of is the example of short-run and long-run shut down conditions that we typically talk about in a variety of economics classes, especially intermediate micro.  In econo-speak the short-run is any amount of time in which there are fixed costs.  Take for example a lease on a building in SE Portland: if you sign a one-year lease and you are on the hook for the lease payment regardless if your business is open or not.  In this case, it may make sense to keep the business running even if you are loosing money.  Why? Well, if you are able to cover your variable costs (labor, electricity, inputs, etc.) and part of your fixed costs (maybe one-half of your lease payment) it is better than shutting down and having to pay your entire fixed cost without any revenue.  In the long-run (a time period in which there are no fixed costs) you would shut down, because you would not renew the lease and so negative profits are a sufficient shut-down condition.

It would be great to see Roots rise again, perhaps as a commercial brewery only, but with the rapidly evolving dynamic of the local beer scene, it is hard to see Roots capturing the attention of the local beer crowd again.  Just like a chef who closes a restaurant, it may be time for Craig Nicholls to re-invent himself and his beer company.  And I think Roots will be far from the last brewery to close locally, with so many new places opening up, the forces of creative destruction will be pretty fierce.  Even though craft beer continues to whittle away at the market share of the macro-brewers, it is likely that the struggles to find shelf-space, tap handles and pub crowds will become more and more intense.  But just like the wonderful and creative food scene that has arisen in Portland, this dynamic is likely to create better and better beers and pubs.  So embrace it, I say.

Beeronomics: Beer Pints Per Mile

A comment on my post about how to choose airline travel for maximum efficiency directed me to the AirScape Engineers Blog wherein I found this wonderful little chart (more on the specifics of the calculations can be found there):

Mode	kW-h/km	kcal/mile	Miles/gallon	kW-h/mile	beer-pints/mile
Bicycle	0.0361	50	629	0.058	0.23
747	0.2521	350	90	0.407	1.59
Electric Car	0.1550	215	146	0.250	0.98
SUV	1.5128	2098	15	2.440	9.54
Train	0.0820	114	277	0.132	0.52

Now, why "Beer Pints Per Mile" isn't the metric of choice in the field is beyond me - it is brilliant!  Here is how I figure it: distance from my house to the Pilsner Room, Deschutes Portland Pub, Rogue is about 6 miles, or 12 miles round trip.  Thus by riding my bike, which I always try and do, burns about 3 pints.  It is rare that I even make it to three pints unless I am lounging for many hours, so essentially my beer consumption is entirely guilt free!  HUB is only about 3 miles, so a round-trip is only 1.5 pints, but then they serve their beer in crazy 13-point-something ounce glasses so I am good for about two.  It would be interesting to know how walking fares in this comparison.

Anyway, time for a biking-themed shirt that says "powered by pints"!

And, by the way, AirScape is an Ashland (or Medford?) based company that sells house fans to use natural ventilation to cool houses.  Cool.

Beeronomics: Taxes Again

Now the Beer Stimulus Bill is hitting the national media: this time the Wall Street Journal, under the tag "can beer stimulus hop up the economy?"  Ha, I like it when the WSJ gets clever.

Can microbreweries revive the economy? That’s the hope of Sen. John Kerry (D., Mass.) and a bipartisan group of senators who are pushing a plan to cut taxes on the nation’s legion of small brewers in hopes of stimulating hiring among craft brewers.

The plan, which was introduced by Sen. Kerry, would lower the per-barrel excise taxes on small breweries’ first two million barrels of beer per year (that’s 62 million gallons) and would triple the size of what the government classifies as a small brewer — to breweries that produce six million barrels a year from two million currently. Some co-sponsors include Sens. Olympia Snowe (R., Maine) and Ron Wyden (D., Ore.), whose states, not surprisingly, rank high on the list of states with the most breweries per capita (see chart below).

So-called craft brewers are one of the few industries to thrive through the recession. The segment grew from 7.2% by volume last year and 5.9% in 2008. The segment has even become a haven for budding entrepreneurs that have been let go from corporate jobs. “There’s not that many success stories in American manufacturing today and craft beer is one of them,” says Jim Koch, founder of The Boston Beer Co. which makes the various Samuel Adams beers. Mr. Koch — whose company is in Mr. Kerry’s home state — has been leading the charge for a lowering of the excise tax on small brewers.

Mr. Kerry’s office estimates that the tax decreases would free-up some $44 million — small potatoes in a $14 trillion economy — that the senator (presumably) hopes would be redirected toward new brewing tanks or hiring new workers. Sam Calagione, founder of Dogfish Head Craft Brewery in Delaware, says lower excise taxes would half his $750,000 federal tax bill. “It could be employees or capital equipment, but it would all go toward growing the company,” he says.

We do have one quibble. Mr. Kerry’s press release states that “Massachusetts started the small craft beer revolution,” but many other historians say that the current craft brew renaissance has its origins in Northern California, where San Francisco’s Anchor Brewing and the short-lived New Albion Co. kickstarted the movement in the ’60s and ’70s.

My main quibble is why is the assumption that any extra revenue would be reinvested and not taken as profit?  The idea that a tax break means more workers hired is silly.  The number of workers are the result of the optimal number needed to produce the beer demanded by the market.  I made this same argument when Measures 66 & 67 were being debated. In any case  here is the cool interactive chart:

Number of Brewers, by State

State	Total Brewers	State Residents per Brewer
Alabama	5	932,380
Alaska	14	49,021
Arizona	26	250,007
Arkansas	4	713,848
California	221	166,320
Colorado	103	47,956
Connecticut	16	218,828
Delaware	7	84,548
Florida	39	469,957
Georgia	16	605,359
Hawaii	8	161,025
Idaho	16	95,239
Illinois	41	314,672
Indiana	28	227,743
Iowa	18	166,809
Kansas	17	164,831
Kentucky	7	609,892
Louisiana	4	1,102,699
Maine	31	42,466
Maryland	21	268,267
Massachusetts	38	170,999
Michigan	70	142,906
Minnesota	22	237,291
Mississippi	1	2,938,618
Missouri	29	203,848
Montana	27	35,831
Nebraska	15	118,895
Nevada	16	162,510
New Hampshire	15	87,721
New Jersey	18	482,370
New Mexico	16	124,022
New York	56	348,041
North Carolina	33	279,467
North Dakota	1	641,481
Ohio	42	273,474
Oklahoma	7	520,337
Oregon	93	40,753
Pennsylvania	75	165,977
Rhode Island	5	210,158
South Carolina	14	319,986
South Dakota	5	160,839
Tennessee	14	443,921
Texas	36	675,749
Utah	14	195,459
Vermont	19	32,698
Virginia	32	242,784
Washington	100	65,492
Washington DC	3	291,031
West Virginia	6	302,411
Wisconsin	66	85,272
Wyoming	10	53,267