The article “Are We in Danger of a Beer Monopoly?” by Adam Davidson of the New York Times discusses the process of a company “building” its own monopoly in a market. Anheuser Busch-InBev (AB InBev) plans on merging with Grupo Modelo (maker of Corona) to increase its pricing power in the US brewing industry. In the past, AB InBev has been such a power that it has set pricing power in a “perfectly competitive” [jargon??] market. AB InBev has said that if competing firms lower prices, then Busch will set their prices lower, starting a price war. With AB InBev having the largest market share of the brewing industry, few firms have the ability to compete with this threat.
The described situation is a market that is said to be “perfectly competitive”, but displays monopolistic characteristics. There are four major beer distributors (AB InBev, SABMiller, Molson Coors, Grupo Modelo) who each have the ability to set their own price. For a product with elastic demand such as beer, consumers will buy whatever product has the lowest price. The brewing industry, has worked as a single entity to keep prices stable, thus acting like a monopolistic group. Grupo Modelo, however, has not adhered to the pricing guidelines and is thus acting as a new firm in the market which sets its own prices. In an effort to keep a monopolistic group, AB InBev has tried to acquire Modelo so that it can determine the firms pricing capabilities and thus make the brewing industry a monopolistic market again. Some may say that this is the first sign of a monopoly forming, but the acquisition and merging of breweries has been a common event (Anheuser Busch merged with InBev and Coors merged with Molson).
Similar to other legal monopolies, the government may have to intervene in the market to protect the consumer. The Hicks-Kaldor compensation principle may apply here in the form of a tax. The national government could levy a tax on the companies equal to the difference of the demand and marginal cost curve. In theory, these tax dollars could be dispersed throughout society to balance out the overpayment for beer by the consumer.
As discussed by Martin in “Industrial Organization in Context,” a monopolistic firm will produce at a quantity so that its marginal revenue equals its marginal cost to maximize profits (pg. 30). The ability of the brewing firms to set price allows them to determine the optimum quantity for them to maximize profit. This leads to consumers paying a higher price for the product than they would if the market was truly competitive.
With the current market there is deadweight loss caused by the price controlling of the firms. The ability to control price also affects the quantity of beer that is produced, allowing the firms to have a larger control over their profits than if the quantity supplied was determined by the consumers. This, in turn, decreases the consumer surplus. Overall an outside player, such as the government, needs to intervene to protect the interest of the consumers and society.
This article raises a few questions. Should the government intervene on behalf of the consumer or should it allow a successful company like AB InBev to keep doing what it has been doing? Would a tax levied on the brewing companies be successful with them being international companies rather than regional ones?
2 Comments
If the market is competitive, then AB InBev has no ability to change price, right? But you (or the article author) may simply lack better jargon. We’ll develop an array of descriptive terms and model-based jargon as the term progresses.
And in a price war scenario, maybe market share is not important, while having lower costs is.
For mergers, firms must seek the approval of the Federal Trade Commission. In this case, the FTC would turn loose a team of economists on the issue (while in typical American fashion AB InBev could present counterarguments before the FTC). I believe that in this case the FTC has given a nod of approval for the merger to go ahead, but perhaps with certain modifications of who does what business where.
More generally, giving a yea-nay is simpler than changing the tax code, particularly when calculating the appropriate tax requires heroic assumptions in modeling post-merger behavior, and would require taxing one firm differently from others. To my knowledge, that is not done in the US, and I could expect legal challenges to such discrimination. But to my knowledge in no state in the US can AB InBev sell beer directly to retailers (much less to consumers!) so it would be technically feasible to levy a tax [no way to shift operations across jurisdictions so as to avoid a tax] even though all Modelo production is [currently!] based in Mexico.
The market described in this article is an oligopoly. This form of market allows the firms to collude and set prices. The economies of scale for the large breweries also allows them to lower costs to the point where they are able to force out some competing firms. Market size is not what gives the large firms power, rather their low costs and ability to eliminate competition.
The mergers and acquisitions process allows this oligopoly to exist. There is a high barrier of entry into the brewing industry due to the high fixed costs of factories, land, etc. This leads to few new firms entering the industry even if many exit. The most successful firms may then begin to merge or acquire new firms as it is easier than building new factories to expand operations. In the case listed above AB InBev merging with Modelo may be a cheaper and more efficient way to expand its business into Mexico.
Comments are closed.