Thursday, August 27, 2009

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.


Ralph said...

An excellent post. Thank you for a explanation that shows you've thought through the different angles.

Jeff Alworth said...

I've no doubt that the macros would make a spirited defense of their case, but I think their argument is weak on the facts (if not the politics).

Macros are a different market. They have totally different consumers--when Deschutes' prices go up (as they have in the past two years) Bud's sales ... are unaffected. In fact, even though prices have gone up among micros, they continue to sell more beer. Despite flat prices among macros, they're seeing sales plummet.

The real question isn't how easily a micro can enter the market. It's how easy another company hoping to enter the tin-can beer market. And in this regard, the record is terrible. Regional beer companies have been systematically run out of business by the big companies in the era of consolidation. During that period, not a single company has made inroads into the macro market.

If smaller companies can't stay in the market or enter one, it's hard to call it competitive.

Ralph said...

Macros are a different market.

That is where your argument fails. A rose is a rose is a rose.

Joe Sixpack has choices when he goes to the package store.

Ask Full Sail how their Session brand is doing.

Most of the beverage cans are made of aluminum these days, not tin.

Jeff Alworth said...

I would actually like to prevail on Patrick to define and describe "market" for our purposes. Ralph, you cite Full Sail Session as a new competitor to the macros. I think this tends to support my argument, though.

A substantial percentage of those consumers only drink micros. Full Sail only sells 90k barrels overall; let's say 10-20k barrels of Session are penetrating the macro market. That's way, way less than 1% of the market. The reason FS can enter the market at all is because for them, it's a niche market. Given that, wouldn't this suggest that it is a separate, distinct market?

Professor, care to bring a little light to our darkness?

Ralph said...

I'm sure we could place the word "market" at the center of the rope and tug all day at it.

You have done nothing more than suggest because BMC, three (ok, 2.5) separate companies, sell an overwhelming majority of the beer they are engaged in some form of anti-competition. The existing companies were approved by our government.

Prices go up. I'm not really wanting to debate the expansion of the money supply, but let's just agree that it exists. Or, as Patrick has suggested, it could simply be price elasticity. I can't tell you for sure as I do not have access to what they were thinking, nor should I as it is a private matter for the individual companies. I don't believe we should get to crack open companies private dealings unless there is evidence of collusion, which I have yet to read. The NY Times piece was nothing more than a supposition (which seems to pass for journalism these days).

As to Full Sail, I don't have enough knowledge on what their production quantities are for their given brands. But it as you suggest 20 to 25% of their brewing capacity goes to a beer that isn't listed as one of their "core brews" I'd say they are going pretty good with that. If they even have a fraction of a percent of that market for light lagers, I'd suggest they market it heavier and try to increase that share.

I'm for real competition, not one in which competition comes at the hand of government intervention.

My point was simple there are several light lagers to choose from at the package store. Nothing is limiting the customer choice to BMC products.

Ralph said...

Patrick, can you please do a post on "Perfect Competition". Thanks.

Patrick Emerson said...

Well, that was kind of my point - that the market for macro beer (or just about any product) is not well defined. Are other 'malt beverages' and micro brews close substitutes for macro beer? Clearly they are substitutes, but how close? We really need estimates of cross-price elasticities to better understand the market.

By the way the answer to "are they the same market?" is "yes and no." You are welcome.

Ralph,I haven't done an "Econ 101" post in ages, so this is a good idea. I'll try and work on it. But now it is Friday afternoon and blogging shall cease until Monday.

Jeff Alworth said...

Ralph, in response to the NYT's "supposition," you offer your own. It will be the Justice Department to determine whether there is enough evidence of anti-competitive behavior to warrant an investigation.

But neither your speculation nor the Times' resolves the economic question of markets. Doing a bit of digging, I find this analysis on the Wild Oats/Whole Foods merger.

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.

My my lights, these are two different markets, though we probably will need numbers to resolve them. I don't think there's any cross-price elasticity of demand between the two. And given the record of the past 50 years, there seems to be zero contestability. (A situation strengthened by the control the bigs have over distribution networks.)

We'd need some numbers to back my hunches, though. Otherwise it's just two guys yammering on a blog.

Ralph said...

If I have put forward any supposition it is simply "Innocent until proven guilty". This discussion has two fronts, so I'll let you choose which you want to follow.

Market Share

Grocery stores are beer are like apples and oranges. You may as well have pulled something out like Standard Oil or Pepsi versus Coke. The "market" in which they compete is nothing like beer. I don't need beer, but I do need food. The most accepted place to get food is a grocery store. My access to beer isn't limited by its availability in a few select outlets.

Also, my choice of beer isn't limited to a two brands. According to the brewer's association there are over 1500 breweries that make beer in the United States of America. The largest number of breweries to exist in over 100 years. An average of over 30 breweries in each state. The craft breweries alone produced over 4 million barrels of beer (an increase of 5% over last year). While the larger breweries are seeing a decrease in volume.

The production from "macro" breweries is shrinking (check your own blog).

You keep suggesting that consumers can't choose between a "macro" and a "micro" when clearly they are choosing between the two. If beer volume is down overall and craft beer sees a surge, did new demand just surface?

Distributors are now to culprit? I can go to BFE and walk in to a crappy quick-e-mart and find stuff besides BMC.


As a home brewer I know the prices I pay for raw ingredients has gone up about 40% over the last two years. I don't have the luxury of long term contracts with growers of my raw ingredients. My volumes are too low. I presume other brewers face increased prices as well and have had to raise their prices they charge. There are several factors I can't know in regards to MC's price increases.

I'll try and keep a running list of why they might increase prices:
Raw Ingredients
Increased capital costs
Shareholders (long list of things, so let's just call it this)
Because they can (price elasticity)

BMC enjoy economies of scale that I'm sure most craft brewery would love have.

Take a look at the dairy industry if you want to go off about price fixing. There are so many more worthy eggs to be broken on price fixing that some cheap beer increasing $0.10 a can.

Ralph said...

I'm disappointed again Jeff. When faced with facts that don't support your case you stop responding. Game, set, match. Good look to you in the future.

Jeff Alworth said...

Ralph, your disappointments, much like your speculations about my intentions, trouble me little.

Ralph said...

...and a sore loser. I'd like to say I'm shocked but I can't seem to muster those words.

You obviously care for nothing more than your own opinion.