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The Economics of Beer

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Carly Ezell

on 10 October 2013

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Transcript of The Economics of Beer

Beer and Beverage Market Structure
By: Stacey Anderson, Sue Coles, Carly Ezell, Daniel Nissimov, Jenny Peng, Jared Poe, Maribel Teran
Market Structure
The Dynamics of Industry Competition for US Micro and Macro Breweries
Victor J Tremblay, Natsuko Iwasaki, And Carol Horton Tremblay
Department of Economics, University of Oregon
Firm Size. Measured relative to other firms in the industry
Industry Concentration:
Is the industry dominated by a few large firms
or are there many small firms?

Market Structure Continued
Integration and Merger Activity
AB InBev’s Deal for Modelo Advances
Perfect Competition
In a perfect competition managerial decisions have no perceptible impact on the market price.

Price is determined by the interaction of all buyers and sellers in the market.

The firm must charge the “market price” or consumers will purchase from a firm charging a lower price.

AB-InBev acquires Grupo Modelo
Monopolistic Competition
At the product level, the beer industry can be
considered Monopolistically Competitive as
products are differentiated based on flavor
and taste.
This market structure also forces firms to add new and improved products to further differentiate.
1.) Many small buyers and sellers in the market.
2.) Identical product.
3.) Buyers and sellers have perfect information.
4.) There are no transaction costs
5.) There is free entry into and exit from the market.

1.) Approximately 2,500 operations in the US.
2.) Approximately 2.25 vendors on any given day.
3.) $30 billion in annual sales.
4.) $1.8 billion in taxes (not all flea markets are
part of a shadowy underground).

AB-InBev Controls 39% of American Beer Market
Acquiring Grupo Modelo, brewer of Corona, for $20.1 billion

AB-InBev must sell US distribution rights.
Increases AB-InBev footprint in Mexico; Reduces control in US Market.

What is Monopoly?
Why is a Monopoly detrimental?

The Math
A few large firms tend to dominate the market.
Figure 1: Oligopoly in the beer market.
Anheuser-Busch Inbev
• Brand Names: Budweiser, Bud Light, Beck's, Stella Artois, Michelob, Natural Light, Leffe, Hoegaarden, O'Doul's

• Brand Names: Miller, Coors, Blue Moon, Mickey's, Pilsner Urquell, Foster's, Keystone, Milwaukee's Best , Steel Reserve, Killian's

Both companies increased prices at the same time, during a recession, and while beer demand was slumping.

Flea Markets
Wall Street Journal, April 19, 2013
Original Plans: AB InBev planned to buy the remaining shares of Modelo for about $20 billion
Lawsuit: The Justice Department filed a complaint in federal court seeking to block AB InBev from acquiring full ownership of Modelo.
New Agreement:
1. AB InBev can move ahead with the purchase.
2. Modelo's state-of-the-art Piedras Negras brewery in Mexico will be sold to Constellation too.
3. Constellation will secure perpetual U.S. licensing rights to seven Modelo brands currently sold in U.S.


Big Beer, A Moral Market, and Innovation
Harvard Business Review
3 Different Business Opportunities
Distilling and Brewing
New Beer Market
The Beer Market
Big Business
What is the type of AB InBev --- Modelo merger?
Horizontal Integration
Antitrust Division of the U.S. Department of Justice
To promote economic competition through enforcing and providing guidance on antitrust laws and principles.
Industries with HHI in excess of 1,800; horizontal merger will increase HHI by more than 100.
An incredible new Guinness Ad breaks industry stereotype
Full transcript