The trusty John Foyston was back in the Oregonian on Sunday (on the front page no less) with what amounts to a very nice overview of the whole hop and barley shortage problem and what it means to Oregon breweries. It got me thinking, what would economics say about brewery strategies and how might strategic decisions already made affect breweries through this period?One common product strategy that is often employed by macro-breweries is vertical differentiation. This is where you create different products or different varieties of products for consumers of varying income and affluence. Thus Toyota has its Lexus cars, the Apple iPod comes in cheap, stripped-down versions and sleek fully functional versions, and Budweiser makes Michelob. This is not a strategy we had seen from the micro-breweries until Full Sail introduced Session. Session is a light lager in the Bud tradition, and I have been critical of the decision to introduce it because I fear it blurs the line between craft and industrial brewing, which may cause an erosion of the loyal following craft breweries have created for themselves. (This is why, I believe, the Full Sail name and logo are not easy to find on a bottle of Session)
But this decision could end up being an inspired one if it turns out that consumers do not reduce consumption of beer in the face of higher prices, but instead turn to cheaper beers (as I suspect they will). It also could make sense in the chase for scale efficiencies. For these reasons I think the introduction of Session is probably a very shrewd short-run decision. However, I still fear the long-run consequences of this blurring of market boundaries.
Update: Though there are no studies I could find that looked at cross-price elasticity estimates between macro and micro brews, the short-run price elasticity estimates for macro brews is about -0.3. This is, I suspect, a lower bound for the more pricey craft beers, but means that for a 10% increase in price, brewers can expect about a 3.3% drop in demand. This is good news, but not, as I mentioned, what I consider the danger point for craft breweries - we need estimates of cross-price elasticity for that.
