Tuesday, January 14, 2014

Price Fixing and Beer

Finally a sexy Beeronomics headline to spice up an otherwise dull week [and to rouse me from my blog stupor - I have been just crazy, crazy busy….sorry]

Anyway, Bloomberg has the gen:
Five German breweries, including the country’s largest family-owned beer maker, and seven people were fined 106.5 million euros ($145.5 million) for illegally colluding to raise the price of beer.

Anheuser-Busch InBev NV (ABI) escaped a fine for being first to report the cartel, which triggered the investigation, Germany’s antitrust watchdog said in a statement today. A probe into two other companies continues, the office said.

“Our investigations have allowed us to prove there were agreements between the breweries based mainly on purely personal and telephone contacts,” Andreas Mundt, president of the German cartel office, said in the statement.

The breweries fined include family-owned Krombacher Brauerei GmbH, Bitburger Braugruppe GmbH, C. & A. Veltins GmbH & Co. KG, Warsteiner Brauerei Haus Cramer KG and Privatbrauerei Ernst Barre GmbH. The companies had their penalties reduced for cooperating with the probe.
This is reminiscent of the old airline price-fixing scandal which was all done by CEOs on the telephone as I remember.

There is not a lot a economics professor can add to this, the motivation and benefit of price fixing is pretty clear - if we all agree to keep price high we can get monopoly-like rents.  Yeay.  But economists also know that price fixing is very hard to sustain because there is always the individual incentive to cheat.  If all others companies keep their prices high, the best individual strategy is to undercut their price slightly.  So these types of arrangements actually are a lot harder than they sound.

But the fact that they engaged in this illegal activity tells us a lot about the competitive nature of the German beer market.  There is so much competition that rents are hard to acquire.  And, once again, the specter of economies of scale mean that it is hard to sustain a number of smaller breweries in this environment.  Just like what happened in the US, the beer industry's natural tendency is consolidation and scale.  So this is evidence that all breweries are feeling the pressure.


Bill Night said...

Patrick, it's not hard to price fix if the state inserts a level of wholesalers into the distribution chain. Then the few wholesalers can easily choose higher prices than would occur in a competitive market.

Which I claim is a plausible explanation for why Oregon -- a state awash in breweries and beer -- has prices significantly higher than other states.

I sound like a wacky Libertarian there, which I swear I'm not, except that they sometimes have a point.

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