Sunday, February 3, 2013

Anti-Trust: The ABInBev Modelo Deal

Finally I can actually blog about economics and beer and, what is more, I get the chance to be pedantic!  Oh joy.

So the US Justice department is finally becoming concerned about the consolidation of big beer and is suing to block the merger of ABInBev and Grupo Modelo:
The Justice Department on Thursday sued to block Anheuser-Busch InBev’s $20.1 billion deal to buy Grupo Modelo, the Mexican maker of Corona beer, saying that the merger would cement Anheuser-Busch InBev’s control of the market and enable it to continue to raise beer prices. Grupo Modelo is the third-biggest beer company in the United States.
The Justice Department is worries that the resulting market concentration from the merger would give the combined company too much pricing power and would lead to higher prices and lower consumer welfare.

And brewing is an industry naturally inclined to big firms (it was not accident that AB became a giant) because the economies of scale are so large.  This makes consolidation and concentration natural.  Economic theory has long realized that with market power firms can raise prices and lower output.  Contrary to popular belief it is the lower output that creates the diminished social welfare NOT the higher prices.  (Prices just determine the split of the surplus, but from a social point of view whether it is the consumers or shareholders of the company that benefit more makes no difference what we care about is creating as much surplus as possible).  

But how does the Justice Department (and other government entities like the FTC and the FCC) decide when big is too big?

The starting point is often a measure or measures of market concentration like the four firm concentration ratio, which simply adds up the percentage share of the market for the top four firms, or the Herfindahl index which adds the squares of every firms market share (these are decimals, 0.15 for 15% of the market so this amplifies dominant firms impact on the market).  When these numbers get big, the DOJ starts to worry about the effect on prices. Sounds easy right?

But is is actually quite difficult because before you can measure the concentration you have to define the market.  In this case the merger might create a dominant firm in the macro lager market but are they competing with craft brewers as well?  What about spirits?  By all accounts the macro brewers are losing market share much faster to spirits than to craft beer, so shouldn't you include them when you are measuring the amount of competition?  ABInBev will certainly argue that they should.

But how do you tell?  In the end it is a judgement call but one useful measure is how sensitive are sales of macro lagers to changes in the prices of other possible competing goods. [Cross price elasticity for you econ nerds]  For example if a decrease int the price of vodka creates a sizable drop in Bud sales you could make a convincing argument that vodka is a real competitor to Bud and that vodka distillers should be counted as in the same market as ABInBev.

Finally, if bigger means more efficient and lower cost than it is not clear that preventing the merger actually makes social welfare increase.  This is why we typically allow monopolies in industries with huge economies of scale (power generation and transmission, for example) but then regulate them in response. We call such firms natural monopolies. 

I have no dog in this fight and I don't think macro brewing rises to the standard of natural monopolies, but this an administration that has not been typically intolerant of monopolies so I suspect that there is good reason to worry about this.  But I don't drink macro beer so I don't care all that much. 

I do think that macro brewers perceive themselves in a battle with spirits and barely give craft beer a thought.  So I don't think the outcome of this case has much of a bearing on the health of the craft beer industry.  

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