Wednesday, January 5, 2011

Beer Exchange

Jerry Campbell / Special to Kalamazoo Gazette

A couple of weeks ago a reader sent me a link to this story in the Kalamazoo, Michigan Gazette about a local pub that is about to embark on an interesting business experiment: a beer exchange (apparently it was on the Marginal Revolution blog). Given the holidays and the fact that I wanted to spend a little time thinking like an economist about this idea it has taken me a while to finally post a blog entry on it.

To get the basics, here is an excerpt from the paper:

The Kalamazoo Beer Exchange, located at 211 E. Water St., formerly home of Charlie Fosters, opened last week for lunch only from 11 a.m. to 2 p.m. Monday through Friday.

Once the Michigan Liquor Control Commission releases the license from escrow, owner James Flora will offer a unique concept for beer lovers.

Flora has 28 taps ready to host some of the best Michigan craft beer, as well as some imported and domestic brews.

His bar/restaurant features several TVs that will show the price of all 28 beers.

Depending on what customers purchase, the prices will rise or fall.

“It’s an ever-evolving happy hour,” Flora said.

The prices will never go higher than around 10 percent the base cost, but will drop to as much as 50 percent below base cost.

For example, a Bell’s Two-Hearted Ale may be $3 normally.

But, depending on the “market” activity (i.e. patrons buying tendencies) it could be as much as $3.25 or as little as $1.50 (prices fluctuate in increments of 25 cents).

The prices will change every 15 minutes and there will be, at random, a “stock market crash” — signified by air horns — when all 28 beers are sold at a low rate for five minutes.

My first take on this is that it is really gimmick and not substantive. As far as the bar is concerned the variety of beer sold is not as important as the overall volume so momentary discounts achieve two thinks from their perspective: one, it can increase overall sales by offering continual discounts (and I assume a clever economist will be there to help them program in elasticity formulas to maximize overall revenue - and if not, I am available!); and two, it can ensure that no one keg sits too long. It is this second aspect that appeals to me as a consumer. Though beer in a co2 keg system stays fresh for a while, it can get stale and a slow selling beer could cause quality degredation.

But I call it gimmick because it is not really a spot market (which would be really cool) whereby customers would make bids and the bar would set prices from these bid prices - then you would really achieve market efficiency!   This, of-course would be hard and clumsy so what they have designed kind of mimics such a market and does reflect some demand conditions.  And just because it is a gimmick does not mean it is bad, just from an economic perspective I am not sure to achieve any higher social welfare - except perhaps it will be a source of entertainment while in the bar. 

There are some interesting side effects to this and most are probably good: consumers that decide to go 'cheap' will get to try some interesting less well-known beers.  Brewers at smaller breweries might sell more thanks to the pricing scheme and thus more people will try their beer.

There are also some interesting strategic considerations as well.  As the reader who sent the link in suggests, a group of punters could coordinate to sent prices high on one beer by all ordering a round of the same one, but then as soon as this drives other prices down, order that beer.  Whether this saves money on average is questionable, but with the 10%/50% rule, it is possible.  There is also potential for arbitrage - buying a pint when prices are particularly low and then waiting for prices to go up a few minutes later and trying to sell the untouched pint for more than it was bought for but less than the current price. 

What do you think?  Is this exactly what your town needs?

1 comment:

Jeff Alworth said...

I think it rocks. I'd go there in a second if it wasn't 2500 miles away.

As for the arbitrage plan, I would LOVE to see a pointy-headed econ prof in a bar trying to hawk an old pint of beer for a quarter under the going rate. Let's see your pretty markets now, sir!