Friday, December 11, 2009

Hops May Help Prevent Prostate Cancer

USA Today reports that an ingredient in hops, xanthohumol, may help prevent prostate cancer by acting as a testosterone blocker. From the article:

An ingredient of beer may someday help ward off prostate cancer, new animal experiments suggest.
The compound in question, xanthohumol, is found in hops — the bitter flavoring agent in beer — and is known to block the male hormone testosterone, which plays a role in the development of prostate cancer.

"We hope that one day we can demonstrate that xanthohumol prevents prostate cancer development, first in animal models and then in humans, but we are just at the beginning," said lead researcher Clarissa Gerhauser, group leader of cancer chemoprevention in the division of epigenomics and cancer risk factors at the German Cancer Research Center in Heidelberg.

The findings were to be presented Dec. 9 at a conference of the American Association for Cancer Research in Houston.

Xanthohumol is a flavonoid, a group found in many plants, fruits, vegetables and spices. Studies of xanthohumol have shown that it blocks estrogen by binding to its receptor, which may lead to prevention of breast cancer, the researchers say. It's known that estrogen and testosterone receptors react in similar ways.

As always, I bring such good news at perfect moments in which to conduct your own experiments. Quick, run out and get yee to Belmont Station and load up with a crate full of Hopopotamus® and hunker down for the ice storm of the century! Your prostate will thank you (and will probably get a lot of exercise as well as you make many trips to the bathroom - okay, a little too much: getting giddy from the end of the term euphoria).

Friday, November 6, 2009

New Pubs Aplenty

Friday. Beeronomics day. But I am busy and later I shall be making my own beer, so I'll farm this beeronomics post to the Portland Biz Journal.

Here is a teaser:

Even though it won’t open for two months, success could be on tap for Coalition Brewing.

The new brewpub will occupy a neighborhood, near Portland’s East Burnside Street and 28th Avenue, known for innovative restaurants and bars. Coalition’s space is also well known because it formerly housed the popular Noble Rot wine bar.

Coalition will join an industry that, thanks to Oregon’s brewing pedigree, is sizzling. Coalition is one of 15 breweries or brewpubs — which sell beer made on the premises and food — that will have started operating in Portland between summer 2009 and early 2010.

The 2009 openings, which roughly double 2008’s, defy national trends. Just 80 such operations will open across the country this year, down from 112 in 2008.

The openings stretch from Portland, where eight new pubs or breweries have begun or will begin operating, to Joseph in northeast Oregon.

“To see so many opening in one state is highly unusual,” said Paul Gatza, director of the Boulder, Colo.-based Brewers Association. “But Oregon does continue to be fertile ground for craft brewing.”

Monday, November 2, 2009

Artisanal Products and the 'Novelty Curve'

Busy day today (week actually) so I'll farm this one out to Beervana blogger Jeff Alworth who has a fascinating tidbit about what Karl Ockert of Bridgeport calls the 'novelty curve.'

Here is Jeff's quote from Karl:

"Every beer that comes along goes through a novelty curve, and ours is no different. [Brewery X] is the current big one on the streets. They’re going through a novelty phase where people are out there trying and sampling. All breweries go through that. If I left BridgePort now and went out and started a new brewery, I could do the same thing. I could take tap handles right and left and get a lot of sampling. But it’s that “stayability”—being able to develop loyalty. That’s the tough part."

This is true of lots of industries, especially ones in fashion (Crocs), technology (Palm) and food (restaurants in general). There is always a new trend, fad, technology, chef, whatever that captures the attention of consumers. But artisanal products like beer are particular in my mind. They can be recreated faithfully over time like cheese, bread, etc., but are always subject to new varieties and tastes. So it has always seemed to me a challenge to stay faithful to the core products and yet maintain interest through new creative pursuits. Bridgeport and Deschutes seem to me the exemplars of this strategy at the moment with their core beers and their special offerings (Stumptown Tart, The Abyss).

But overall this says to me that the market for craft beer is exceptionally healthy. From a Schumpeterian point of view this innovation and creativity will leave some breweries behind, but this is all part of a healthy creative destruction process. So it is both a pretty exciting time and a pretty scary to be in the business, bit overall it seems lie a market that has huge potential to keep expanding for a long-long time and the winnowing out of less exceptional and creative breweries will actually help this process.

Wednesday, October 28, 2009

Hops and Asymmetric Prices

Faith Cathcart/The Oregonian

After my rather lengthy disclaimer about how talking about beer is a device through which I discuss economics principles and have some fun in the process, I tenuously dip my toe back into the beeronomics pond...

The always reliable John Foyston has a great article in today's Oregonian on something that I informed my loyal beeronomics devotees of a month and a half ago: the hop shortage is over and in fact we are in a hop glut.

But I am not a reporter. Thankfully, John is and he has uncovered some fascinating aspects of the current situation. One interesting fact is that apparently because the hop shortage convinced breweries that they needed to contract in advance for their hops, there is currently no spot market at all for hops. So excess supplies have no where to go. Amazing.

The big news, which is in Foyston's lede is that this glut of hops should not result in lower beer prices, even though prices rose significantly with hops prices.

This comes as no surprise to an economist. For one reason, the statement above about how all hops were forward contracted means that prices cannot fall due to the glut in supply. Brewers locked in higher prices as an insurance policy to ensure a supply of hops and, well, lost the bet in essence. Foyston himself makes this point.

But the other reason that this economist is not surprised is what I mentioned in that previous post. Across a huge array of industries, price changes tend to be asymmetric. Industries are very quick to raise prices in response to higher costs but very slow to lower them when costs come back down. This does not seem to be true of individual retailers, by the way, so don't blame them, but it is especially true of industries like beer that have complicated wholesale distribution networks.

Here is Sam Peltzman of the University if Chicago writing in the Journal of Political Economy:

Output prices tend to respond faster to input increases than to decreases. This tendency is found in more than two of every three markets examined. It is found as frequently in producer goods markets as in consumer goods markets. In both kinds of markets the asymmetric response to cost shocks is substantial and durable. On average, the immediate response to a positive cost shock is at least twice the response to a negative shock, and that difference is sustained for at least five to eight months. Unlike past studies, which documented similar asymmetries in selected markets (gaso- line, agricultural products, etc.), this one uses large samples of di- verse products: 77 consumer and 165 producer goods.

So it looks like the craft beer industry is no different. So even when forward prices adjust to the increased hop supplies, we shouldn't expect beer prices to follow suit.

One quick note on the ephemeral nature of fresh hop beers, since we are on the subject of hops. I finally got my hands on a bottle of Deschutes Hop Trip which was, by most accounts, one of the real gems of the fresh hop beers this year, so I was excited. Unfortunately it was a total dud. It was brewed a while ago now and the hop essence had completely disappeared from the bottle. The beer was thus an under-hopped disaster. And for $5.50 this is a problem, I expect a superior beer at that price. This, I think, illustrates the difficulty of bringing a fresh hop beer to a mass market in bottles, though in the past few years I have not had the same experience.

Although, strangely enough this is why I like fresh hop beers so much: they are as far away from industrial macro lagers as you can get. They exist only in a moment in time and are connected to the land like wine. So I don't mind suffering the occasional dud. But I do think breweries are going to have to keep track and establish "sell by" dates to limit the number of dud beers sold.

Tuesday, October 20, 2009

Fresh Hop Ales in the NY Times

A wonderful article by local writer Lucy Burningham.

Matt of Double Mountain gets the hops.

Matt and Charlie brew.

All photos: Lisa Bauso for The New York Times

The nascent Killer Green.

Friday, October 16, 2009

A Clarification

I am not a 'beer economist.' I am not sure what that would be, but I know a whole lot less about the beer industry than other members of the economics department at OSU, for example.
What I am is an economist and the point of the beeronomics posts is not that I am an expert on the economics of beer (whatever that would be), but that economics can be understood through all sorts of real world industries, markets and phenomenon. The point of beeronomics then is to have fun learning about and thinking about economics in less-conventional ways.

I happen to like brewing, consuming and learning about craft beer. And I happen to really like, without exception, everyone involved in craft beer that I have ever had the good fortune to meet. Oregon also happens to be the epicenter of the craft beer renaissance in America. So it seemed to me to be a natural and fun industry to use to explain and discuss economic theories. I can also go off and write purely self-indulgent posts about beer that have little or nothing to do with economics (as long as my editor doesn't notice).

The main motivation behind the creation of this blog was to try to create a place, outside of the classroom, where I could connect with students and others interested in economics. I think economics is interesting and enlightening and that it can also be a lot of fun. The beeronomics posts started as an attempt to demonstrate both aspects.

I say all this because I have been told a few times recently that I have garnered a reputation for being the 'beer economist' and that what I know about is mostly beer. Both assertions are false: I know very little about the beer industry (except the little I have learned through this blog)and I know a lot about many other things. I do, on occasion, refer to my academic research (which has nothing to do with beer) in this blog, but talking about it incessantly would get boring fast.

First and foremost I am a well-trained economist that is curious about many things, interested in the intersection of economics and policy, and someone who enjoys teaching and is excited about his discipline and what it has to offer the neophyte. Oh, and I also enjoy the occasional beer.

With that said, here are some recommendations from recent ventures to the beer store/pub:

Full Sail Vesuvius - beware this is a deceptively big beer, find someone to share the 22oz-er with. An economist would describe a big beer as one that has fairly large diminishing marginal returns.

Bridgeport Stumptown Tart - also surprisingly big and the cherry can become cloying if you drink too much so, again, find a partner for the big bottle.

By the way, I bought a bottle of Sam Adams Cherry Wheat on a lark - big mistake. Yuck. You are so much better off springing for and savoring the Stumptown Tart

Dry-Hopped Mirror Pond on cask at the Deschutes Portland Pub - probably long gone, but man oh man, this uber-classic is stunningly radiant on cask. No diminishing marginal returns here, it was hard to stop drinking.

Friday, October 9, 2009


Hey, The World, the Beeronomics schtick is mine, bug off!

Ahh, just another example of the contestability of markets: I may be a monopiolist, but nothing prevents new competitiors to enter so my market power is basically nill.

Sigh, guess I'll relax, have a beer, and forget about it.

Friday, September 25, 2009

Ending Slavery

From an Advertising Age article on the National Beer Wholesaler's Association Show (read: beer distributors):

The convention's liveliest speech came from Boston Beer CEO Jim Koch, who employed the frankness of, as he described himself, a public company CEO "who owns all the voting shares and can say what I want." Mr. Koch's talk covered a range of industry topics. To point out how profitable the U.S. beer market is, he pointed to the $2 billion in cost cuts currently being inflicted upon A-B. "You can take $2 billion out of what everyone thought was a well-managed company," he said. "Imagine being able to piss away $1 million an hour and still being able to get what you need." He also implored wholesalers to abandon strict franchise agreements that make it difficult for small brewers to choose who distributes their beer, not a popular point in a room full of wholesalers. "I believe in the 21st amendment [abolishing prohibition], but I also believe in the 13th amendment [abolishing slavery]," he said.

On another note, as an addendum to my post on fresh hop ales, I found myself at the Rock Bottom recently and they have, on tap, a delightful wrinkle: a fresh hop lager. Very tasty and exceptionally quaffable.

And yes, this is a post of a man with no real time to blog - sorry. Enjoy the weekend!

Wednesday, September 16, 2009

Beeronomics & Bikeonomics: The Greatest Thing Ever

Via John Foyston, the greatest thing ever:

That would be Hopworks's Christian Ettinger on the new HUB BarBike.

You got to love it, but I would not want to try and pedal that thing up Powell when full.

Saturday, September 12, 2009

Hoppin' It Up in Hood River

I got a note from the good folks at the Hood River Chamber that the Hood River Hops Fest has a website with loads of information. From the website:

Featured breweries again will include Gorge favorites such as Double Mountain Brewery, Full Sail Brewing, Big Horse, Elliot Glacier, Walking Man and Mt. Hood Brewing.
Oh yum. Plus, if you go, you'll also be able to enjoy the delights that await you at the Double Mountain Taproom and the Full Sail Pub if you want some more Killer Green or Lupulin, are ready for a different variety of excellent beer or are just ready to sit and enjoy some good eats - you can't go wrong either place.

Friday, September 11, 2009

Hop Shortage Update

In 2007 the worldwide hop shortage loomed as a potential disaster for breweries. Fortunately, those crafty craft brewers seemed to have weathered the shortage with aplomb. And now some good news: 2009 was apparently a bumper year for worldwide hop production. Why? Good weather and increased acreage that is a result of the recent high hop prices (hooray for markets!).

Expensive hops are partly to blame for increased beer prices. With a bumper crop, hops prices should return to something close to pre panic levels suggesting that we should see beer prices come down as well. However, economists have found that in many markets producers are quick to increase price when costs increase but slow to decrease prices when costs come back down - the classic example being retail gasoline and crude oil prices.

So, brewers, distributors and retailers: how are you going to respond?

Thursday, September 10, 2009

Going Local and Staying Connected

Regular readers of my blog will know that I am a bit skeptical of the net economic benefits to 'going local,' but this is often confused with lack of support. On the contrary, I am a supporter of the local economy, I just think claims about the economic benefit tend to be grossly over-inflated. But, though overall monetary benefits are likely small (and may even be negative), I support the local economy because I am a big believer in the public goods aspect of community itself. I believe that an inter-connected and supportive community reaps huge non-market benefits to all its members. I am also enough of a naturalist (though usually of the economic kind) to relish the ability to connect to the earth and its bounty as directly as possible.

This is why I rejoice in living in Oregon when the hop harvest time arrives. And it has arrived! What this means to you, dear closet economist and beer lover, is an astounding array of fresh, or 'wet' hop beers on offer throughout the state. Now, some purists decry the use of fresh hops as a gimmick that produces mediocre beer as the essence of wet hops are different and much more unpredictable than their dried counterparts. Bah! To me fresh hop ales give me a connection to the land from whose bounty beer is made that is unattainable in regular beers. I love those too, but to be able to taste the raw hop essence that Oregon soil has spawned is a delightful fall treat.

And each year the treats become more numerous. Here is just a sampler of what you can find this year:

John Foyston (who is responsible for these wonderful pictures - I stole them wantonly) is all over the latest Full Sail Lupulin offerings. Normally I save Beeronomics Posts until Friday, but am posting this early so that you know to get yourself to the Pilsner Room tonight to savor John Harris's latest fresh hop magic. Not to be missed (though you will have the opportunity to try them for a while at the pub). John is arguably the grand master of the fresh hop ale (arguably the grand master of northwest brewing, for that matter), and his 2007 Lupulin won Beervana's coveted Satori Award.

[Grower Doug Weathers and brewmaster John Harris at Sodbuster Farm in late August. Credit: John Foyston]

Eugene City Brewery, an affiliate of the Rogue empire, goes one better in the freshness quotient: Rogue grows their own hops and ECB managed to get their hops into the kettle just one hour and 37 minutes after the harvesting from Rogue's hop farm in Independence. Talk about fresh. The first taste is ALSO tonight so if you are in Eugene you can drown your sorrows about having a football team that is all flash and no substance in fresh hop beer! (Okay, that was a gratuitous and uncalled for jab - but it's all right, you can just come on up a bit north if you want to see how a real college team plays football).

Bill at It's Pub Night reports on a first taste of Deschutes' King Cone Ale which is currently pouring at the Portland pub.

The Oregon Brewers Guild has also announced the fresh hop "tastival" schedule: October 3 - Hood River Hops, October 10 - Oaks Park, Portland, October 17 - TBD, Eugene. Oh happy day! I live just a hop skip and jump from Oaks Park, so hopefully I can manage to swing by...

And finally, what hands down is the coolest fresh hop happening of them all (even if it doesn't necessarily yield the 'best' beer of the bunch): Angelo of Brewpublic reports on The Lucky Lab's all-comers hop harvest ... The Mutt is a-brewin'!

And who could resist stealing Angelo's wonderful photograph of this guy. I wonder who he is?...

Thursday, August 27, 2009


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.

Friday, August 21, 2009

News and Notes

On a short little getaway to Seattle, so a quick post today on a couple of little news tidbits.

First, The Oregonian reports that the OLCC is considering doing away with its prohibition on happy hours advertisements. Ads are an interesting thing in economics. Some types, like ones that say "this dish soap really cleans well" seem to be purely a waste of money - they all say it and the consumer is no better informed for having seen the ad. So why do they do it? (Scour this blog to find the answer). Another type of ad we call informational and their utility to consumers is obvious: they inform consumers about particular product features, prices, hours of operation, etc. This reduces search costs which is good for competition and usually results in more sales and lower prices - both good for consumer welfare. So in this case, were alcohol like any other good, this would be unequivocally good for consumers. To the extent that happy hours ads promote excessive drinking and this excess has a social cost, one could argue that the net effect is ambiguous. For my part, I think it is good. Happy hours are no mystery (bars and restaurants can advertise in the establishment all they want) so allowing outside advertisements I don't think is going to increase consumption much, but it will allow consumers to make more informed choices when it comes to happy hour, and this is a good thing.

Second, via the Beervana blog, comes news that craft beer sales continue to rise despite the recession, albeit as a slightly lower pace than a year ago. As I have mentioned a number of times before, it was not at all clear if macro-brews were seen by consumers as a close substitute to craft beer, so that when times got tight, coupled with rising prices, consumers would flee craft beer en masse. The answer appears to be nope. That is very good news indeed.

Enjoy the weekend.

Thursday, August 13, 2009

Good News

The Portland Business Journal is reporting that the Craft Brewers Alliance, created in the merger of Widmer and Red Hook, which had had to weather some merger related bumps in the road, has had a very strong quarter and has returned to strong profitability.

This is a much more complicated business structure than most, but to the extent that it shows craft beer sales are remaining strong in the recession, it is welcome news.

Good on ya Bros.

Friday, August 7, 2009


Beervana, the Blog has a nice follow up on the state of the Green Dragon, an independent tap house in SE Portland that was treasured by the beergnoscenti, but which ran into financial trouble and was bought out by Rogue. You might expect Rogue to transform the Green Dragon into a Rogue house featuring all or mostly Rogue beer. You would be wrong. They have kept it largely as it was and sometimes it can be hard to find Rogue beer there at all.

In fact as, Jeff points out, Rogue is going one step farther and hosting an 'Indie Beer Fest,' and wonders why they would highlight their competition? Well it is likely because they are cool and don't see their business as a zero-sum game. And they might be right.

There are many instances in economics where business relationships are both competitive and cooperative. One example is where there are network externalities: the more people use a product the more other potential buyers value it. Consider the very first phones, if you were the first person to own a phone in the US, it wasn't worth much, but once your entire community got one, everyone got more value from it. So if you were a single phone manufacturer, sure you wanted to get as many sales as possible for yourself, but the price you could charge and the number of potential customers increased with the number of sales your competition made as well.

Another example is where you have a demand that evolves, like from weak diner coffee to strong Starbucks coffee. Customers learned to prefer strong coffee and began to demand it everywhere. So if you were a coffee house selling strong stuff, having Starbucks expand locally was both direct competition, but it also served to increase the demand for your coffee.

Both of these type of situations are probably relevant for the pub business. A pub business specializing in craft beer in Portland will be enhanced the more good beer there is to serve and the more people have learned to prefer craft beer. Even if you brew your own beer, exposing more people to good craft beer might lead to a net increase in demand for yours as well.

I doubt that Rouge thinks in these terms, but that is the thing about economics - understanding why patterns exist even if the participants don't understand the incentives involved. Jack Joyce once described the craft beer industry as jerk-free (OK, he used slightly more colorful language). I think that this is partly that there is a recognition that while there are many competitive aspects of the business, each individual success bleeds over to group success. With the focus on taking away market share from macro-brewers and creating more demand, there is just less focus on internecine battles.

OK, head too full of economics, getting too serious about all of this. Time to relax and have an Oregon beer. Cheers, and have a good weekend.

Friday, July 31, 2009

...and This Just In

From the New York Times:

"[Professor Gates] said that instead of his usual Red Stripe, he drank a Sam Adams at the meeting in honor of an ancestor who fought in the American Revolution."

So apparently he reads the blog.

Normal and Inferior Beer

Speaking of macrobrewing...

And so it come to pass: sales of beers like Bud, Corona and Miller are falling precipitously, while sales of beers like Busch and Keystone are up. Inferior goods are goods for which demand rises when incomes fall. Of course these infoerior beers are made by the same folks that make the normal stuff, so there is no reason for the beer companies themselves to be hurting.

I keep getting mixed reports about how craft beer is doing. I know anecdotally that some company's sales are soaring, like Ninkasi (proving that there is justice in the world) whole some are struggling. The question is, do consumers of craft beer think of it as distinct from macro lagers (as I do) or just a bit better? In economics terms, how close a subsitiute are macro lagers to craft beers (especially ales)?

At any rate, the recession is proabably a prime motivator behind the 'session' beers that are now becoming popular with craft brewers. I would be interested to know, for example how Full Sail's Session sales are doing compared to its regular line-up. My guess is pretty well since they just introduced a second Session.

None of my attempts to collect data to answer this question have yielded any fruit, so we can only wonder...

Anyway, my advice: if you are 'trading down,' go for the Session and skip the Keystone.

Thursday, July 30, 2009

Being a Populist in a Globalized World

There has been a lot of media coverage of the 'beerfab' that President Obama, Professor Gates and Sargent Crowley shall partake in this afternoon. Many media outlets are examining their choice of beer and what each symbolizes: Jamaican Red Stripe for Gates, Blue Moon for Crowley and, of course, the uber-populist choice of Bud Light for Obama (Bud light being the number one beer in America in terms of sales).

But if Obama were trying to go for the all-American beer, he missed the mark. Budweiser is owned by parent company InBev which is headquartered in Belgium. And if Gates's pick were seen a symbolic nod to the African diaspora, well, this too falls a little short. Red Stripe is owned by Diageo, the beverage giant that was formed in a merger of Guiness and another company and is headquartered in London. Even Blue Moon, which tries to sell itself as a microbrew is a Coors product. At least that is American, right? First, a merger of Canadian Molson with Coors created MolsonCoors which has a headquarters in Montreal. Then South African giant SABMiller, which is now headquartered in London joined in a joint venture called MillerCoors. So the simple story is that the world of macrobrewers is completely globalized now and 'local' brands are more about marketing than substantive differences in the beers.

What a shame. With a thriving industry of craft beer producers in the US, they have to go for the conglomerate beer. Sam Adams Founder Jim Koch was magnanimous on NPR about the shunning of US craft beer, but he shouldn't have been. Given that the kerfuffle that lead to this meeting happened in the Hub, a Boston lager would have both been appropriate and much more enjoyable.

Friday, July 24, 2009

Oregon Brewers Fest

Its Friday, sunny, and the Oregon Brewers Festival is on - what are you doing reading a blog?

I could wax economic about optimal beer company strategy, the state of the craft beer industry, but now is simply the time to go forth and enjoy the bounty. Read this and you are ready to set out for Waterfront Park.

Friday, July 3, 2009

Employee Owned Companies

Yesterday, Full Sail Brewing celebrated 10 years of employee ownership. They have a lot to celebrate. Full Sail appears to be thriving largely because they seem to have an exquisite sense of the market and have made some pretty savvy commercial decisions that seem to have worked out very well (e.g. the logo and packaging redesign of a few years ago - including the cringe inducing "Brewed to Stoke, Stoked to Brew" slogan - and the successful release of Session). Of course, they also produce excellent beer... But should we expect employee ownership to make a company like Full Sail more or less commercially savvy?

Economists in general have always been fairly skeptical of employee owned companies. The dominant theme in the literature is generally that the incentives of employee owners are to reward themselves at the expense of the firm and to be more interested in the short term success of the company than its long term growth, as well as to have too diffuse a decision making structure and to have too little independent supervision of employees. For example, can employee owned companies make the hard decision to cut positions in economic downturns?

On the other hand, employee-owned companies can be seen as a solution to a classic principal agent problem in that they tie employee compensation to the economic success of the firm. In this theory, employees should be more motivated, disciplined and productive as they understand that their effort is directly linked to firm performance. This incentive is amplified for smaller companies. [One reason why economists tend to be skeptics is that this incentive is often pretty small at the individual level, so would seem to be dwarfed to the incentive to give yourself a big raise regardless of firm performance, for example]

So is Full Sail the exception the the rule or a classic example of the sensibility of employee ownership? Well, it turns out that almost every study of employee owned firms has found that they are either no worse or slightly better than non-employee owned firms in terms of firm performance. [See this nice meta-study for some evidence] It appears that ownership in companies can, in fact, boost firm performance be giving employees a larger interest in the success of the firm.

It is particularly interesting that in an industry that is artisanal in nature this should be true - you might expect another tension between making distinct beers with small market potential and more mainstream beers. Full Sail seems to be mastering both, they were pioneers in developing the more macro-style 'Session' beers, and yet produce some of the most distinctive beers in their 'Brewmaster's Reserve' series. How much does all this have to do with being an employee-owned company is impossible to say, but perhaps it is not too surprising after all.

Regardless, here is to another 10 years of success to Full Sail. Cheers!

Friday, June 26, 2009

Peak-Load Pricing

Pelican Brewery in Pacific City, Oregon is among the very best Oregon breweries (as evidenced by their many, many national and international awards) and yet it is very hard to find their beers in the store. This something that I wondered about: why aren't they more available in Portland (and other parts of Oregon)?

An answer immediately suggests itself when one visits the brewery. It is located at a wonderful spot on the coast, but Pacific City is a little out of the way as it is off US 101 a bit. It is also on the Oregon coast which is wonderful in summer but can in winter. One expects then that they have a familiar problem in economics: a fixed supply capacity (the brewery) and a variable demand. Electric utilities are the most common example given of this: there is high demand during the day and low demand overnight. For Pelican, one imagines that they sell lots of beer during the summer and have a lot of excess capacity in the winter. So they could increase capacity to sell more bottles in Portland but this would potentially exacerbate the overcapacity in the winter (or may not if demand for bottles is seasonal in the other way).

The economics answer to this problem is what is known as peak-load pricing, an extra charge for buying at a peak time. Perhaps Pelican should charge $6 for pints in May-October and $3 in November-April, for example. This would even out the demand during these periods and help solve the excess capacity problem.

Okay, so perhaps this is a bit fanciful, but I sure hope to find more Pelican Beer in Portland, it is great stuff.

Friday, June 12, 2009

Search Costs

Economists describe the cost of having to search (for a product, a low price, a mate, etc.) as, you guessed it, search costs. The result in equilibrium is that the higher the cost of searching the less you will do. So, for example, I was much more inclined to buy a CD, say, at whatever price I saw it for it the store I happened to be at than I am now that I can search for low prices easily on the internets. (Yes, I know, I am a dinosaur, I still buy the occasional CD) This leads to more intense competition, lower prices and, ironically, less of a need to search in the end because price disparities will be lower.

It is for this reason I celebrate the release of Beer Signal, a new free iPhone app that allows you to search the current tap lists of Portland-area pubs. I'll let Jeff of Beervana explain it in detail. My first try, based on first hand knowledge of a neighborhood pub I patronized yesterday with an end of school year celebratory fish and chips with my son suggests it has some work to do to become very accurate (which will be helped along by users so I am acting in a self-interested way in publicizing it). Still, it lowers search costs, enhances consumer welfare and will promote diverse and often rotating taps.

Better living through technology indeed...

Friday, June 5, 2009

Drink Beer not Gatorade!

Via John Foyston (from whom I shamelessly stole this beautiful picture) come some wonderful news: beer is a better rehydration agent than water, or so say Spanish researchers:

Researchers at Granada University in Spain have come across a discovery that will undoubtedly please athletes and sports enthusiasts - a pint of beer post workout or match is better at rehydrating the human body than water.

Professor Manuel Garzon, a member of Granada's medical faculty, made the finding after tests on 25 students over several months. Researchers believe that it is the sugars, salts, and bubbles in a beer that may help people absorb fluids more quickly.

My soccer team will be so pleased to hear that they were right all along...

Friday, May 29, 2009

Friday Notes

Oregonians, your wait is over! Boundary Bay's extraordinary IPA is pouring at the Concordia Ale House, as is their oatmeal stout. Get thee some!

UPDATE! Ack, the IPA has now be dropped from their tap list - and I haven't even had a chance to get myself there (I was planning a trip tonight). Someone else needs to start pouring BB in Portland. Come to think of it, we are pretty short on Washington beers in general...

The Honest Pint Project's Jeff Alworth testified to the Senate Business and Transportation committee yesterday about the honest pint bill in consideration. Shortly thereafter, it was killed in committee. I am/have been ambivalent about the bill so I am not too sad but feel bad for the supporters of it. Time for the "Beaver Pint!" (TM)

Beer prices are soaring at my local grocery. I grabbed a sixer of Full Sail because it was the cheapest at $7.99, Deschutes' offerings were $8.99 and Rogue $10.99. Wow. Is this everyone's experience?

Friday, May 22, 2009

An Economist's Preferred Honest Pint at Belmont Station

This escaped my attention until now. Via John Foyston, a message from Belmont Station:

A FULL 16 ounce PINT EVERY TIME. You asked for it, we're delivering. We are now using oversize glasses with a 16 ounce line. Be patient. Let it settle a moment. If it's not 16 ounces we'll top it up. More beer for you. Less waste!

Yeay! Kudos to them for going to marked glassware. I have not seen them, but I can only hope that the mark looks a little something like this:

Wednesday, May 20, 2009


I had a fascinating conversation with a brewer recently about beer ingredients. It started with a talk about a possible impending shortage. This time in malted barley as, he claims, the ethanol market and subsidization is making more and more acreage go to corn. Plus, he said, growing barley for malting is risky because if the quality is not there, it is no good for malting and the price of non-malting barley is very low. There is also continuing concern about hops as well as the acreage of hops apparently continues to shrink. All this suggests that we may be paying even more for beer in the future.

But what really interested me was the claim that we should also expect the average quality of ingredients to suffer. Makes sense: with smaller amounts of barley and hops, even marginal crops will make their way into beers that they might not have before. Apparently there is also a pecking order for ingredients whereby bigger brewers get the best stuff and smaller brewers get ingredients of lesser quality. [That means home brewers are getting the real crappy stuff, I said, and he concurred] I have never noticed quality differences from smaller breweries, so does this means that they are especially good at overcoming poor quality ingredients to produce great beer?? Any brewers out there like to refute this assertion or concur with it?

Switching gears, because it is Friday and because where else would you turn for beer reviews than an economist, Beervana? Ha! I don't know where Full Sail is in the pecking order (probably pretty high) but either way, John Harris continues to produce remarkable beers. His latest, Keelhauler, is a Scottish ale meaning a malt-forward beer. I don't tend to like these very much as I am a bit of an incorrigible hop-head, but John's is, predictably, magnificent. It retains the traditional rich malty body but is nicely rounded with hops giving it a delightful scent and making it a more flavorful beer than most. Kudos. The spring season also brings out my favorite of the seasonals: Full-Sail's Prodigal Sun, new faves Ninkasi's Spring Reign and Deschutes' Red Chair. All three are worth the price of admission a few times over. Get ye some.

Making the pub rounds: Deschutes Bitter (on cask at the PDX pub), Fish Organic IPA (on cask at Belmont Station), Ninkasi Tricerahops (on cask at Bailey's Taproom) and how about an old classic served Real Ale style: Deschutes Mirror Pond (on cask at Horse Brass). Do you see a pattern? Yes, Portland needs more casks...please!

Thursday, May 7, 2009

A Story of Honest Pints and Poor Pours

In which the Beervana blogger and Honest Pint Project mastermind is told by his economist friend (guru really) that he should not be upset at this pathetic pour at the Deschutes Portland Pub because it is a full information game - the glass is 20oz. but the pour is about, what, 16?!? The point is you know it is a lousy pour. And there is a solution: tip not, says I, though our server is great - but she needs to be on top of the bartender who is lazy. After a nice beer, however, everyone relaxes, the server is tipped well and the sun breaks through the clouds on a wonderful spring day in Portland.

And the beer is fantastic - XPA on cask. Wow. Go now. Just ask them to give you a full pour.

Is Craft Brew Recession Proof After All?

I stumbled across this little tidbit when I was looking for some coverage of Boston Brewing's Q1 report (the essence is business is down at Boston Brewing about 5%). Here is the interesting passage from the Patriot Ledger of Quincy MA:

Craft beer sales appear to be holding up during the recession, boosted by customers strong demographics.

Throughout the U.S. beer industry, overall shipments from brewers have declined 3 percent year-to-date compared with the previous year, said Benj Steinman, president of the trade publication Beer Marketer’s Insights. Import shipments have declined 19.3 percent, with domestic shipments down 1.8 percent.

For the 52 weeks that ended on March 9, craft beer sales rose 12.6 percent from the previous 52-week period, compared with 3 percent for all beer, according to data from market researchers the Nielsen Company.

What is particularly interesting to me is that I had assumed that imports were probably a decent proxy for craft beer sales and I knew sales of imports have been down. But in reality it seems that consumers are very loyal to craft beers and not shifting to macro from craft. In economics terms the cross-price elasticity of craft and macro brews appears to be very inelastic, or that beer drinker do not think of macro lagers as a good substitute for micro brews.

This is good news, I wonder if Oregon brewers are experiencing the same thing? I hear through the grape vine that things have been tough, perhaps this is due to inventory depletion on the part of distributors and retailers (something that would explain the seeming 3 percent down 3 percent up contradiction in the second and third paragraph). If this is the case, inventory depletions rather than sales, we might see a lot of new orders coming in soon as the inventories run out.

But Boston Brewing's recent struggle also suggests that within craft beer the environment is getting more and more competitive and they need to continue to fight off the challenge of all of the new 'it' beers that come along. As I mentioned a few days ago, I think this is precisely why Deschutes is pushing its specialty releases hard.

This is also good news for my brother, who is finishing his master brewer certificate program soon and is looking for work. He has offers in hand, but nothing yet from Oregon. Anyone hiring out there?

Monday, May 4, 2009

Mass or Niche Markets and Incentives

I had to stop at a Safeway to get some milk on the way home alst night and on the way to the dairy case I spied a bottle of Deschutes Red Chair IPA. Well, I have a duty to sample it for the loyal readers that tune in for my erudite discussion of economics, right? Sure. Seriously, this is a magnificent beer - hop-forward IPA you get seriously strong hop aroma and taste but without the heavy bitterness of, say, a Hop Henge. Wow - what a wonderful result. Good thing I only bought one. It is medium bodied, slightly more malty and darker than a typical IPA, but exceptionally balanced and eminently quaffable. Yummy.

It made me think of the other new beer I have tried recently: after a long wait my local grocery finally started stocking 'Drifter' from the Bros. Widmer. This beer followed a similar philosophy, they used Summit hops to create a medium bodied pale ale that has the nice citrus-y aroma characteristic of Summits but without the bitterness.

What is interesting is the completely different approaches to the business of beer these two offerings represent. Drifter is a fine beer (but a bit far from my personal sweet spot - I like bitter): it is a mild, medium bodies pale ale that is designed to please the masses. My immediate thought was: "this is their Fat Tire fighter." In my mind this is a beer deliberately designed for mass appeal to a defined market that supports a huge volume of Fat Tire sales. "Let's go for that market," I can hear them saying. And, with luck, it will - it is a better beer than Fat Tire.

Deschutes is busy these days (with a stable of exceptional standard beers in place) pushing the fringes with specialty beers, cementing its reputation not only as an outstanding volume beer producer, but a truly top class boutique brewery as well. By doing this, I imagine they think they can keep up their reputation and keep getting noticed and thus the sales of the standard line up will be bolstered.

Widmer does this too, of course, but I wonder how much being a public corporation changes the incentives. Does always worrying about the return to investors cause a more intense focus on producing beers with mass appeal? I don't know, but I suspect so. It doesn't really matter - as long as they keep making good beers, I am happy to have both around. Oh and someone had switched out a couple of Drifers with some Hefewizen, and drinking them took me way back to when it all began and reminded me that, though my tastes have moved on, it is still a really good beer.

Globalization and the Cost of Bottling

[Photo Credit: Angelo De Ieso II of Brewpublic]

Mike Weksler of Portland's Green Bottling e-mailed me yesterday with this dilemma:

In January of this year my cost to purchase a case of 12 22oz amber beer bottles went up $.65. It is less expensive for me to purchase my bottles from China, ship them here, and rent a facility to store them than it is for me to purchase them from the local distributor.

What is worse is that the local distributor gets the bottles from an OI plant that is in NE PDX, 3 miles from our HQ.

I don't like the idea of sending our money away from the local economy, and the extra fossil fuels that I would have to consume to get my glass shipped to PDX.

I could also choose to buy my bottles from a plant in OK for $1.20 per case less than I spend now as well.

I am rushing off to Eugene so don't have time to comment too much, but will try and do so later. The standard trade argument would be: well, we should not want to make bottles here, just the high value-added beer and by letting China make the bottles we are all better off (us and the Chinese) . A rejoinder to this is that the cost of shipping is artificially low as the shippers do not have to pay the true cost of carbon usage, so while it may be privately profitable to source bottles from China it is not socially profitable. [This assumes, by the way, that the China plant is not more energy efficient than the PDX plant, which I think is a safe assumption]

The answer? Well, a global carbon tax that accurately reflected the cost of carbon emissions would get the prices right, but let's get real, that 'aint gonna happen anytime soon. So what do you tell a guy like Mike, who is trying to do the right thing, but who knows that if he goes local, some other person could start another bottling business that sources from China?

What do you think?

Thursday, April 9, 2009

Honest Pints

Beervana blogger Jeff Alworth's Honest Pint Project is getting a lot of play in the news these days, and even in Salem. See his Honest Pint Project website for details about all of the news coverage. But this report by KATU's Jeff Jaeger is the best one I have seen to explain very clearly the problem.

I have blogged about the economics of the problem before: it is an asymmetric information problem - punters can't tell how much they are getting but bars know how much they are serving. The incentive then is for businesses to cheat and the market outcome will be inefficient. What is nice about this story is that they find a place, Grand Central Bowl, that intentionally uses cheater pints (14oz glasses) and advertises a 'pint' on the menu. This is exactly the problem. [As is the problem of establishments that are unwittingly using cheater pints]

But this is also why I am not so sure about the bill. It seems fairly innocuous, so I don't think there will be much harm done, but the much easier and permanent remedy has always been, in my mind, marked glassware. It is incredibly cheap (if you allow a phase in period) and solves the problem permanently.

Saturday, April 4, 2009

Craft Brews and the Recession

Jeff Alworth has a wonderful post on the 25th Anniversary of Widmer Brothers Brewing Co. Well worth a read and congrats to the Brothers Widmer!

Unfortunately, this economic downturn is starting to take its toll on the craft brewing industry in Oregon. The Portland Business Journal is reporting the $33 million loss that the Craft Brewing Alliance, the company created by the Widmer - Redhook merger, suffered in 2008. Trends in the local brewing industry are worrisome as consumers abandon the more expensive craft brews for cheaper substitutes. From the article:

December and January shipments for all Oregon craft brewers fell by 5 percent and 7 percent, respectively. But in January and February, shipments for all beer in Oregon actually rose by 10 and 20 percent, spectively. “It would appear trading down from higher-priced, locally-made beer has already begun in earnest,” said Brian Butenschoen, executive director of the Oregon Brewers Guild.

This substituting cheaper alternatives has always been my concern for the local brewing industry. Just as department stores like Macy's are suffering while Walmart is thriving, during a downturn the purveyors of cheap substitutes tend to do well relative to their more expensive counterparts. This works both ways, however, which is part of the reason why craft brewing did so well during the last boom period. As this recession is going to be long and deep, I wonder how the breweries will fare. This is also a time in which big brewing conglomerates might try and snap up ailing independent brewers so that they have products with which to compete when the recession turns around.

Friday, April 3, 2009

Scottish Ale

I don't generally like Scottish Ales. The Scots may have mastered the Malt, but to my taste their ales are far too, well, malty (and by 'their' I am really referring to the style called 'Scottish Ale' as practiced in the US - I have no idea what a Scottish Ale tastes like in Scotland, I am always too consumed with trying the aforementioned malt when I am there, and the beer I have tasted there was no different than the stuff in Eng-er-land). I tend toward the more hoppy ales of the Pacific Northwest. But I adore just about everything Full Sail's John Harris brews. So the news that John has made his first Scottish-style ale, 'Keelhauler,' raises the distinct possibility that I may have found one that I am really going to like. I don't think John could stand for a beer that is too malty/sweet. I expect one that is nicely balanced and that opens my mind to the possibilities of Scottish Ale. Yum.

Pilsner Room anyone?

Monday, March 30, 2009

Recession Proof?

The Portland Business Journal is reporting that Widmer-Redhook lost $33.2 million in 2008.

From the article:

In the [annual] report, the company said one-time charges related to the merger, the economic environment and fuller-flavored offerings from big-name domestic brewers have sliced into the company’s sales.

This is the first place where I have seen it said that offerings like Budweiser’s American Amber are starting to cut into craft brewer's markets. I hope this is not a reflection of the market, which only turned really grim in late 2008. As 2009 is horrendous, this would be very worrying for the state of craft brewers if it represents a general trend.

Thursday, March 26, 2009

Back to the Future?

The craft beer cognoscenti often talk about how the new craft beer movement in America is a return to the past where breweries were decidedly local (and perhaps reflected local tastes though most beers were pilsner style beers imported by german and eastern european immigrants). I agree that the local brewery is a return to the past, but the localization of breweries in the late 19th and early 20th centuries was largely a consequence of the difficulty of transporting a bulky and heavy product. The modernization of transport, especially post WWII, in my mind at least, was a major factor in the consolidation of brewing which was able to exploit economies of scale in all aspects of the industry. But of course you loose something in the process: variety (such as it was).

But this supposes that there was a lot of variety in local markets prior to the great consolidation. I suspect not, for the very same reason that led to the creation of local breweries: transportation was costly. On most local shelves in the US in the early 20th century, I suspect, was a choice of only a few locally produced beers.

So really then, we are currently in an unprecedented era where we now have a dizzying array of beer choices available to us in our local stores. I used to buy Rogue in Ithaca, NY, and in Portland I can find obscure Belgian beers, microbrews from all around the US, and tons of special brews. What does it all mean? Well, for one, we can identify regional tends in styles and flavors more readily and as producers try and distinguish themselves in a crowded marketplace the incentives are probably to try and produce more and more unique beers.

Which is the point of this rumination: the rise in specialty brews (things like Deschutes' Dissident, Full Sail's Slipknot, etc.) is part and parcel of this newly crowded marketplace. I think breweries are finding it ever more important to create some buzz and attention through the creation and marketing of these brews. It is a wonderful trend for the beer enthusiasts, but is also a sign of an industry that is still evolving. I think a lot about where it will all settle (e.g. how many breweries can the market sustain), but I suspect that this is an industry that will always have a lot of churn - many new breweries starting up and many old ones closing. This is not necessarily a bad thing, it means lots of constantly changing variety. Or perhaps the big brewers will successfully capture the market by introducing their own micro-style brews, it all remains to be seen and is pretty fascinating.

Okay, so in the final analysis this post is pretty aimless, but this is what happens to someone shut in for over a week with sick kids. Hopefully it makes a little sense.

Tuesday, March 24, 2009

Death and Taxes and Beer

Well I am not dead, so I guess I had better turn in my tax forms. As I am not enjoying Bend and Mt. Bachelor as was the plan for this spring break and am instead dodging nasty germs that my sick kids are constantly releasing into the stale air of my house, I figured I might as well do my taxes. But now that they are done, my thoughts turn to beer. This begs the question, what is the best beer to have post-taxes? (And this year I don't owe any extra taxes so I don't have to go the malt liquor route to drown my sorrows, in fact I can be a bit profligate since I get a modest refund - permanent income hypothesis?, pah!)

Well, I had to go to the local Safeway for a prescription (see: sick kids, above) I figured I'd pick up some post-tax filing celebratory beer. Unfortunately, Safeway's beer selection is the worst in Portland, but I figured that among the many Widmer beers they sell would be the new 'Drifter' that I am eager to try. Nope. Dang.

But aha! Salvation. Of all random things they have a 22oz-er of Deschutes' hop bomb 'Hop Henge,' this is a perfect post-tax beer. A huge beer that will nuke your senses and rid you of that bad tax after-taste. I find 'Hop Henge' and the similar 'Hop Lava' from Double Mountain a wee bit much, yet I still enjoy them immensely and they are perfect for certain situations (and this is one). I love hops, but these are intentionally out-of-balance for the serious hop heads, so beware should you go looking for that perfect post-tax beer.

After my Hop Henge, all the nasty memories of the Form 1040, the Schedule A, the Form 2441, the Schedules SE and C-EZ and on and on and on fade away and my consciousness is transported to Bend - where I was supposed to be all along. Thanks Gary and the Deschutes crew! [BTW, be nice to my brother who is in the brewing program at UC Davis and going to be doing an internship with you in April]

So, what is your choice for your "Thank God I am Finished With My Taxes!" beer?

Friday, March 20, 2009


Its Friday, so let's talk beer because I am just tired of talking about economics. John Foyston reports in The Oregonian that Pelican Brewery of Pacific City brough back 10 medals from their 10 entries in the Australia International Beer Awards.

This is some well deserved recognition for one of Oregon beers real treasures. Of course, somehow it seems unfair. Good beer should come from the dreariest, dankest corners of Oregon. Pelican, in a spectacular setting on the coast, should cook up some mediocre beer for the tourists and leave well enough alone. Well, they don't. Their beer is exceptional with an impressive range and amazingly consistent quality.

Economists know about compensating wage differentials - what about a compensating beer differential? Folks in Bend and Pacific City have it all, its not fair.

NB: Spring break is upon us so spotty blogging ahead for the next week. I am going to Bend to get my own dose of the good life.

Tuesday, March 17, 2009

3.2 Beer and Craft Brewing

[Note: Oregon economy is just too grim, so today let's think about beer!]

Beervana blogger Jeff Alworth sent along this little beeronomics puzzle: in Colorado, craft brewers have taken a stance against repealing the restriction that allows only beer with an alcohol content of 3.2% or less to be sold in grocery stores. See news reports on the story here and here.

What gives? Why are craft brewers afraid of this change? Here is Left-Hand Brewing's Eric Wallage: “It’s terrible, if it passes, it’ll completely junk up the market for craft beers.”

The premise is that the 3.2 law basically shuts out the supermarket market for craft beers. This is not really true, it is easy to make beer for this market. I asked my fellow L&C alum who is the brewmeister for Boulder Brewing how they made their 3.2 beer. "Just add water" he replied with a rueful smile... But it is likely that the distinctive flavors and qualities that are the hallmark of craft brews over macro brews are largely lost when drowned in water. So, essentially, they believe that this is not their market (though Fat Tire seems to sell exceedingly well in supermarkets). Thus, they perceive the liquor store as their 'turf' and they want to protect it.

But there is no economic reason to suggest that liquor stores have different incentives when it comes to selling beer, nor is it clear that the clientele is different than in supermarkets (or would be in equilibrium). My experience in Colorado was that liquor stores did not have beer displays that were substantially bigger than supermarkets (especially since groceries are constrained by the 3.2 law) and that liquor stores seemed to devote plenty of space to macro brews. They are profit maximizing firms after all, just like grocery stores, and in absence of the law, I would expect just about equal space being given to craft brews as macros in the groceries. It is all about the demand. In fact, I had a conversation with my local liquor store owner in Denver and it was clear that he was stocking only what sold well (we were talking about the removal of Full Sail), he did not express any real personal devotion to craft beers.

One would expect that being able to sell their beer to a broader market would be in the craft brewers interest. It certainly has not hurt the craft brewing industry in Oregon. This is particularly true because of the fact that demand for craft brew is a function of experience. Craft brew is an acquired taste and the more craft breweries can get people to try their beers, the more future demand they can expect.

So what gives? I suspect that this is a short-sighted political move by the craft beer industry in Colorado to curry favor with liquor stores in hopes that they will give deference to Colorado beers. This is dumb, because of its short-sightedness and because of the aforementioned fact that liquor stores are profit maximizing firms and will respond to demand. When push comes to shove, you can't take goodwill to the bank.

One thing is certain, the real looser in this fight is the consumer who will face higher prices and less convenience. Craft brewers ought to think about that.

Friday, March 13, 2009

Honest Pint in Salem

Beervana blogger Jeff Alworth's Honest Pint Project is gaining some serious traction. A new bill has been proposed that would require inspections of pubs and would certify their compliance with a true 16oz pint rule with a official decal (I imagine one like the state health 'complied' and 'exceeded' stickers for restaurants).

Though as an economist I support the Honest Pint Project, I do not support this legislation. I think it is costly, requiring inspections; I think it is not entirely effective, there are plenty of opportunities for cheater pints; and I think there is a better solution.

My solution has always been to do what the Brits do: require marked glassware like in the picture. Glassware suppliers can certify the volume and etch it on the glass itself. It is a lot easier to monitor a few glassware suppliers than hundreds of pubs and restaurants and etching adds very little to the extra cost of glassware (and can be phased in to save a big one-time cost to pubs and restaurants). Besides, having an Oregon state seal on a glass certifying its volume would be cool!

The reason I support this remedy is because it addresses the essential market failure: asymmetric information - drinkers do not know the volume of the glasses their beer is served in. Once full information is restored, the market will do the rest.

One More Comment About the Beer Tax

Usually taxes such as these are proposed to address some external costs. But the problem with making the leap from a beer tax to alcohol and drug abuse (and related crime and treatment) is that this is an external cost only associated with a small minority of beer drinkers. In fact as I mentioned in my earlier post, moderate beer consumption may actually cause a positive externality, suggesting (economically) government may wish to subsidize moderate consumption.

Other taxes are different. Take a gas tax, there is a large and recognized cost associated with the release of carbon into the atmosphere and it doesn't matter how much you drive, when you drive or how fuel efficient your car is - the carbon content of a gallon of gas is the carbon content of a gallon of gas. When you consume a gallon of gas in any manner of use, the cost to society is the same. Thus a tax on gas is purely Pigovian. We all pay a price that reflects the costs we impose on society.

Not all sin taxes are like beer taxes, the effect of cigarette smoke are harmful for even moderate smokers and also for those around them. So a tax is much more efficient in addressing the external costs here. But Beer is simply not the same thing. As a occasional and very moderate drinker of beer I impose no external costs - so making me pay a higher price is not Pigovian but simply an arbitrary, and distorting, tax.

Thursday, February 12, 2009

Beer Tax

Sin taxes, taxes on things like alcohol and tobacco, are often justified economically as Pigovian because of the adverse health effects that create costly demands on the state-supported medical system. There is a mountain of evidence suggesting that cigarette smoking has severe adverse health effects and these smoking-induced maladies create large costs for the state, so taxes on cigarettes appear to be pretty well-founded (the appropriate level is still a matter of much debate - especially since the effects of secondhand smoke may be much larger than was once thought).

But can beer taxes be justified along the same lines? There is a lot of evidence suggesting moderate consumption of beer is actually good for your health. But there are also negative health benefits from alcohol dependency and both the health effects and the behavioral effects impose costs on the state. But I would argue that beer is not the main culprit (I would at least like to see evidence that it is) for alcohol dependency. Furthermore a selective tax on beer would simply shift alcohol consumption to other forms of alcohol (potentially more potent ones) which would not solve the problem. So I don't find much of a convincing economic rationale for a beer tax.

So the news that the Oregon Legislature is considering, once again, a bill to raise the tax on beer is disheartening. Just because it is politically expedient does not make it right. The justification of the bill is appalling: alcohol and drug addicts create huge costs for Oregon, yes, but just because you can't tax illegal drug use doesn't justify harming one of the few bright spots in the Oregon economy by placing the burden of drug and alcohol rehabilitation on beer consumers and producers. Beer brewing in Oregon is still a relatively small part of the economy, but it is growing and, according to the Oregon Brewer's Guild, represents about 5000 jobs.

At a time when we are trying to stimulate the economy, raising taxes is counterproductive and this one particularly so.

Monday, February 2, 2009

Beer Prices and Signalling

The discussion about beer pricing strategy continues at the Beervana blog with an interesting comment from one of the pre-eminent beer retailers in the nation: Belmont Station (no longer on Belmont, but why quibble?). Here is an interesting tidbit:
Some breweries (like Rogue) are quite proud of their beer, and regardless of
whether or not Dead Guy cost significantly more than Inversion they want to
project an image high quality, expensive beer, so they price it higher.

Nobel prize winner Michael Spence won his prize for developing the theory of signalling. The idea is this: if you are a high productivity person (because perhaps you are especially smart), how to you credibly convey this to a prospective employer. You can't just say "I'm very smart" because if this increased the likelihood of you being hired or getting a higher wage, everyone would say it even if it were not true. So you have to find other ways to let them know, or 'signal' your type. One way to do this is to obtain more education. This works because acquiring this education is easier for those that are smarter. Less smart individuals will decide not to invest in education, because it is costly and, after employed, employers learn your true type. So in equilibrium there is a natural sorting, smart people get educated and less smart people don't and, here is the punchline, employers can use education as a real measure of smarts.

[By the way I tested this model (with Mike Conlin now at Michigan State) using new players in the NFL and found that players with some private information about their ability can signal this through holding out and delaying agreement on a contract. The idea is that missing some training camp is more costly for less able players than for more able players.]

This basic model has been translated into advertising. Why do some manufacturers spend a lot of money on ads that tout the superior cleaning ability of their laundry detergent? Any manufacturer can claim this but consumers figure out whether this is true. Since what manufacturers of laundry detergent want is to get customers to become loyal to their brand, if spending a lot on ads does not get consumers to keep coming back, it is pretty wasteful relative to those brands that do get consumers to become repeat customers. Thus, again, there is a natural equilibrium, high quality brands will do a lot of advertising and lower quality bands will not and, again, the punchline is that the ads themselves are credible signals of the true quality.

What does this have to do with beer? Well, if Chris of Belmont Station is right, high price is itself a signal of true quality. Since consumers figure out beer quality by trying it once, price itself may be a reliable signal of the quality of the beer. To put it another way, if consumers didn't think Rogue was exceptional beer, they could not get away with their high prices, so the fact that they can is a signal that they do indeed make exceptional beer.

So it is not necessarily just a matter of projecting high quality, but informing consumers about quality as well...