Did US beer mergers cause a price increase?
Orley Ashenfelter, Daniel Hosken, Matthew Weinberg, 18 September 2013
Football season is here. Bud, Miller, or Coors, the classic American lagers, are the beverage of choice to accompany the big game throughout the US. Despite the recent surge of microbrews and imports, the big three brands still capture more than 60% of the market. With the recent merger of Miller and Coors only two large national brewers remain. No doubt many beer drinkers have wondered whether this merger has raised the price of their brand.
We have recently taken up the task of answering this question. We did this for two related reasons.
- We wanted to measure net price increases to beer drinkers.
- But we also wanted to see if we could sort out (a) the cost savings that might result from beer production being closer to consumers from (b) the monopolistic pressure on prices that mergers encourage.
What did we find? Well, it turns out there were both anti-competitive effects of the merger and cost saving effects. What this means in practice is that whether a beer drinker faced a price increase or a price decrease depended on where the drinker lived. On average prices neither increased nor decreased, with increases in some markets being offset by decreases in others.
Merger effects in principle
In theory, a merger gives the combined firm an incentive to increase price. Some of the sales that would have been lost pre-merger following a price increase are now recaptured because the product portfolio owned by the firm has increased. Simultaneously, the merger can result in reductions in marginal cost that provide the combined firm with an incentive to lower prices.This cost-versus-margin trade-off has been understood by antitrust economists since at least the publication of Williamson’s (1968) classic paper describing the welfare analysis of mergers. It has been included in the US evaluation of mergers since the publication of the 1982 version of the US Department of Justice’s and Federal Trade Commission’s Horizontal Merger Guidelines. Surprisingly, given their potential importance to policy analysis, there is very little direct evidence that merger specific efficiencies (reductions in marginal cost) can offset the incentive of a merger firm to increase price.
Efficiencies brewed
In June of 2008, the US Department of Justice approved a joint venture between Miller and Coors, then the second and third largest firms in the industry. Although the merger substantially increased concentration in an already concentrated industry, it was allowed because of anticipated reductions in shipping and distribution costs (Heyer et al. 2008). Prior to the merger Coors was brewed in only two locations, while Miller was brewed in six locations more uniformly distributed across the US. The merger was expected to allow the combined firm to economise on shipping costs primarily by moving the production of Coors into Miller plants. These are exactly the kind of cost savings that could offset any incentive to increase prices through a loss of competition.Two features of the beer industry assist us in estimating the effects of the merger.
- First, by law beer is sold through a three-tier distribution chain.
- Second, there were substantial differences in how the merger was expected to increase concentration and reduce costs across markets in our data.
Research design
The basic idea in our paper is to compare price changes across regions that differed in the size of Miller and Coors prior to the merger and how the merger would reduce the distance to the nearest brewery.- Figure 1 demonstrates the approach we took in its simplest form.
- The first panel shows that average prices grew faster in regions where the merger was expected to increase concentration by more, as measured by the increase in the Herfindhal Index (sum of squared market shares), holding constant the reduction in distance.
- On the other hand, price growth tended to be lower in markets where the reduction in distance to the nearest Coors brewery was greater, holding constant the market power effect.
We also explored the timing of these two effects. Firms can likely leverage any increase in market power very soon after the merger is consummated or even after it is announced and management teams begin anticipating combining operations. In contrast, efficiencies gained through shifting production will not be realised until the merger is actually consummated and then may be realised only with some time.
- Figure 2 traces out the timing of the effect of the predicted increase in concentration on pricing.
Figure 2.
Figure 3 presents the timing of the effect of the reduced distance on pricing. The figure shows that the reductions in shipping costs were not passed through until about a year and a half after the merger was approved, consistent with industry documents describing the operations of the combined firm.
Figure 3.
We find that the efficiency effect eventually nearly exactly offset the market power effect in the average market. Despite reducing the number of macro brewers in the US from three to two, the Miller/Coors merger did not harm the average consumer.
Conclusion
Over the past 20 years a large number of studies have studied how mergers have changed pricing. In a meta-analysis, Kwoka (2013) shows that most studies have found that prices rise after competitors merge. However, not all papers find price increases. The evidence in the petroleum industry is mixed, and Ashenfelter and Hosken (2010) found that four out of five large mergers of retail consumer-product manufacturers raised prices. Presumably, cost savings are the reason why some of the studied mergers of competitors did not result in higher prices. Our current work suggests this is the case and takes a step towards getting inside the black box of how mergers change pricing incentives.References
Ashenfelter, Orley and Daniel Hosken, “The Effects of Mergers on Prices: Evidence from Mergers on the Enforcement Margin,” Journal of Law and Economics, 2010, 53 (3), 417-66.Heyer, Ken, Carl Shapiro and Jeffrey Wilder, “The Year in Review: Economics at the Antitrust Division, 2008-2009,” Review of Industrial Organization, 2008, 35, 349-67.
Kwoka, Jon E., “Does Merger Control Work? A Retrospective on US Enforcement Actions and Merger Outcomes,” Antitrust Law Journal, 2013, 38 (3)
Williamson, Oliver, “Economies as an Antitrust Defense: The Welfare Tradeoffs,” The American Economic Review, March 1968, 58 (1), 18-36
12 comments:
The recent merger of Miller and Coors left people wondering whether or not there would be a significant price increase. Another factor, football season, also contributed to the question. Before the merger, the three main brands (Bud, Miller, and Coors) captured over 60% of the beer market so now that there are only two beer fans are concerned. Mergers in general have a strong incentive to increase price. When competition goes down, generally price goes up. In this case, other aspects offset that general assumption. Coors only had two brewing locations in the US while Miller had six more uniformly distributed throughout the country. With more locations to brew and ship from comes substantial cost savings that could offset price increases. So overall, reducing the number of macro brewers from three to two did not harm the average consumer. In other situations, price increases are inevitable and have monopolistic characteristics. The merger between Coors and Miller could very well have taken over the market, but it didn't. They also avoided increasing prices of their brews by saving money in distribution costs.
-Brittani Muller
With football season here how does the merge of two of the big three brands in American lagers effect your pocket? The goal of a merger is to create a new, larger organization with more market share. Because the merging companies' business operations may be very similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs. Prior to the merger Coors was brewed in only two locations, while Miller was brewed in six locations more uniformly distributed across the US. The merger was expected to allow the combined firm to economize on shipping costs primarily by moving the production of Coors into Miller plants. The fear of having an empty wallet attempting to purchase either of these drinks is unnecessary. Usually with large mergers like this, manufacturers raise product prices. However in this circumstance, cost saving were the primary reason be hide the Coors and Miller merge.
-Mitchell Borrero
The main idea of this article is to discuss how the merger of Miller and Coors may have raised the price of beer, seeing as there are now only two large national brewers. In theory, a merger gives the combined firm an incentive to increase price. Mergers can result in reductions in marginal cost that provide the combined firm with an incentive to lower prices. Coors and Miller were allowed to merge because of anticipated reductions in shipping and distribution costs. In this case, average prices grew faster in regions where the merger was expected to increase concentration by more. Also, price growth tended to be lower in markets where the reduction in distance to the nearest Coors brewery was greater. In conclusion, cost savings contribute to why some mergers of competitors don't result in higher prices. In my opinion, it seems obvious that there is no set rule in whether or not a competitive merger will cause price increases. This is too circumstantial. For example, if Coke and Pepsi were ever allowed to emerge, they would control almost the entire market for carbonated drinks. This could allow them to charge whatever they liked for their products because consumers would have less options, or they could choose to lower their price because consumers are most likely to continuously buy their product now that they would be the number one supplier.
-Kaitlyn Szilagyi
As mentioned by the article entitled “Did US beer mergers cause a price increase?” by Ashenfelter, Hosken, and Weinberg, a merger of two companies generally results in an increase in the prices of their products. This is because the company now gains the possession of a good that is a substitute to their original product. Because they own the substitute, sales that would have been lost with a price increase of the original good are now recaptured by additional sales of the substitute. In the case of the merger between Coors and Miller, I’m really surprised that prices weren’t raised on the whole. Especially because of the fact that beer is generally price inelastic; we would think then that they would increase prices in order to raise total revenue. Nothing is stopping them from raising prices, so it confuses me why they haven’t. I suppose that the stated reduction in shipping costs by the moving of production of Coors into Miller plants could be one of the reasons why prices are still kept low. Perhaps with the savings in marginal costs they have decided to spare the consumer from the burden of a price hike. While I might not understand why they haven’t raised the prices of their beers, I’m sure the consumers appreciate that the prices are mostly the same.
-Anthony Riccio
I thought this blog was very interesting since football season is now in full gear. Because Bud, Miller, and Coors controlled 60% of the US beer market, they had a strong influence on setting prices. Now that Miller and Coors have merged, there is even less competition between the majority of the beer market. This allows the newly merged company to raise the price of beer due to the fact that the product has become more inelastic. However, on the other end, the price can be reduced since this new company now has eight brewing locations instead of six. This will allow for cheaper transportation costs to a licensed state distributor. In a way, the increase of beer has not affected the consumer that much because one could argue that the price is rising simply due to inflation. The market in the US is at an all-time high, and people are becoming more confident it will do well, so people will not really think twice about whether or not to buy a beer that has its priced raised by one dollar. In my opinion, this was an intelligent move for Miller and Coors to merge because they raised the price of beer and reduced their costs at the same time. Things couldn't get any better for this producer.
-Benjamin Stark
With the recent merge of Miller and Coors, many people who are fond of these types of beers wonder whether there will be an increase in price or not. When it was Bud, Miller, and Coors these brands still managed to capture more than 60% of the market. With football season here, i think they should increase the price. I think this because beer drinkers usually stick to the same beer they have been drinking due to the fact that it satisfies their taste buds. They are not going to stop drinking their favorite beer because it went up a couple of dollars in price. Which means beer in general is inelastic. I would raise prices on the products because it will only make the total revenue higher. They have the power to do so because they were two out of the three highest beverage choice out of beer. They could only increase but for right now i think they are just playing it safe to see how things go.
-Vincent Barbetto
The merging of two huge company such as Miller and Coors allows them to control their products and being able to manage it to their interest. This is due to them owning such a high percent of the products being sold on the market that their aren't many competitions. Some will even consider a monopoly, which will allow company to easily raise their price without losing because consumers have less option of what product of such to buy from
Josuel Paulino
With the merger of the Coors and Miller brewing company, many patrons who have been drinking these beers regularly are now wondering if a price increase is sure to follow. Especially with the NFL season now well underway which can almost be associated hand in hand with drinking beer. Based on evidence from the article, I do not believe that this new merger will lead to any dramatic spikes in the prices of any Coors or Miller beer products. A multitude of cheap American lagers can be found in great number in any liquor store or any store that sells alcohol in general. This means that there are tons of substitute beers that could be put in place of Coors or Miller. Therefore, if the price of these products were to jump with any significance, say 4-5 dollars, people will jump ship and buy another beer until the prices of the Miller and Coors brews came back down. Meaning the demand for these beers is relatively elastic ensuring that the merger will in no way lead to a monopoly.
-Michael Scalia
when two companies merge, obviously it reduces the competition and makes it easier to do business. the marginal cost is lowered, so a company can increase or decrease their prices. some decide to take full advantage and raise their prices. for two companies to merge, they have to undergo many studies of their cross elasticity and elasticity in general. if the government feels they will not be able to monopolize their market, then they are able to merge. the reason they were allowed to merge is because there are so many different beers out there that it is very unlikely they could monopolize the market.there are so many other substitutes, that a price increase could cost them more. their best plan is to keep the prices the same. they are already two of the highest rated american beers, so people like the beer and feel it is well priced already.
Benny Villani
It is very interesting to see how well the merger is turning out to be for Miller and Coors. I think they are playing smart and doing the right thing. The price determined in each market is determined by the demand of the product. Even in the article it says mergers usually cause the prices to rise. So was the case with the Miller and Coors merger but the price started decreasing overtime because of the decrease in shipping costs. The demand for beer is sort of limited. I say this because one, there is an age limit to consuming beer and two because of some cultural or religious beliefs of people. If the decrease of shipping cost happened lets say for the arguments sake in the sugar industry, i think the price would have remained the same. Thats because they know the total revenue would be higher if the price remained the same because the demand is very inelastic. But in the case of Miller and Coors, the demand elasticity is different. I think the price of a good depends on the markets elasticity.
-Asfand Khan
The merger of Coors and Miller left people shocked because of their incentive to increase the rice in the beer. The three main brands of beer Miller, Coors and Bud combined to over 60% of the whole entire market! This left many drinkers conncered and worried about the price increase and how this may affect them and their drinking. A brewer must first sell its products to a state-licensed distributor who then sells these products to a retail outlet. Having these restrictions loses out in direct money as well and makes it less efficient. We know that the main reasons behind the merger were cost savings.
-Joseph Dowling
I believe that the price of beer being raised due to a merger is completely logical. In a merger, both businesses may be trying to expand, but may also take on each other's problems, specifically financial problems. In order to level out each other's problems they may have to raise the price of their goods to help pay off expenses such as shipping cross-country or internationally. This is definitely a complication when two big beer businesses, such as Miller and Coors, who both hold a lot of weight in the beer lager market choose to join hands. All beer consumers can do is understand that their beloved suppliers are in the business for money and need to swallow the taxes and raised prices that come with a merge.
Alonzo Goffe
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