Introduction The brewing industry was once held to competition among many breweries in small geographic areas. That was almost a century ago. The U. S. brewing industry today is characterized by the dominance of three brewers, which I will talk about in this paper. There are many factors today that make the beer industry an oligopoly.
Such factors include various advancements in technology (packaging, shipping and production), takeovers and mergers, economies of scale, barriers to entry, high concentration, and many other factors that I will cover in this paper. Over the course of the paper I will try to define an oligopoly, give a brief history of the brewing industry, and finally to show how the brewing industry today is an oligopoly. Brewing Oligopoly? The beer market has turned itself into an oligopoly in the past 100 years. Where there once were hundreds of brewers across America, there now are just a few major players in the industry.
But what is an oligopoly? As defined by Ayers & Collings in the textbook Microeconomics, "an oligopoly is characterized by multiple firms, one or more of which will produce a significant portion of industry output" (microeconomics). Oligopolies exist where a few large firms producing a homogeneous or differentiated product dominate a market. There must be few enough firms so that they are mutually interdependent, which means they must consider rival's reactions in response to decisions about prices, output, and advertising. The causes of the beer oligopoly are as followed: 1. Economies of scale exist, which indicate that a few large firms would be more efficient that many small ones. 2.
A high degree of capital investment required. 3. Other barriers to entry may exist like patents, control of raw materials, large advertising budgets, and traditional brand loyalty. History of the Beer Industry The brewing industry in the United States began in 1625 when the first brewery was founded. In the early stages the industry, competition among different breweries only existed in highly secluded small geographic areas. It was not until refrigeration and pasteurization that companies could transport beer across previous geographic limits and begin to grow into the industry it is today.
After prohibition there was a sharp decline in the number of brewing companies. Almost 90% of the brewing companies from 1947 to 1995 went bankrupt. This sharp decline was mostly due to four major breweries growing rapidly and realizing economies of scale. By 1980 Anheuser-Busch, Miller Brewing, Pabst, and Stroh's were the main four that made up nearly 80% of the market.
By the mid-nineties it was down to three major players: Coors, Miller, and Anheuser-Busch. The beer industry includes packaging manufacturers, shipping companies, agriculture, and other businesses who depend on brewing. The American brewing industry employs approximately 1. 66 million Americans today.
There are generally three tiers of beer suppliers in the United States: domestic giants like Anheuser-Busch and Miller, importers, and craft brewers. The Beer Industry Today In this paper I will be talking about the U. S. beer industry and in short an overview of the brewing industry worldwide. I will talk about the barriers to entry, economies of scale, government intervention, pricing, current market trends, product differentiation, and imports. The focus being mainly on the U.
S. brewing industry oligopoly. The U. S. brewing industry has three major players: Anheuser-Busch, SAB Miller, and Coors/Molson. Anheuser-Busch is currently the largest brewer in the world, producing over 100 million barrels a year.
Anheuser-Busch currently owns over 50% of the market in the United States, with Miller trailing behind at 20% and Coors at about 11% with the rest of the market occupied by imports and craft breweries. When analyzing any industry, how easy it is for newcomers to enter the market is a great importance. If there are high barriers to entry due to economies of scale, government intervention, hostile takeovers, or high concentration, inefficiency exists and the company on top can reap monopolistic gains. However, if there are not barriers to entry, companies will not be able to raise prices and realize profits. The brewing industry it different from many other industries because it is not governed by laws regarding patents or exclusive grants. A majority firm does not control the inputs required for brewing beer and the supply for brewing materials is fragmented.
There are high costs associated with entering the brewing industry, such as establishing a network of suppliers and distributing the product. It has been estimated that the construction of a four to five million barrel a year plant would cost around $250 million, and this is just the fixed cost of building and maintaining the brewery. There is an even greater amount of capital needed when the marketing activities needed to distribute beer are added in. This all means that any new entrants would have to invest heavily to establish a strong reputation and brand awareness.
It may seem odd that a company of Anheuser-Busch's size is allowed by the government to maintain such a huge portion of the market. But nothing in the way Anheuser-Busch prices products or promotes them is monopolistic in nature. There is still heavy competition among other corporations because of different product offerings, which makes it more beneficial for the industry to be an oligopoly. It is clear that the economic impact that micro breweries and craft breweries have had on Anheuser-Busch has been very minimal.
The beer industry is a highly concentrated industry with the top three brewers generating over 75% of the industry sales. Anheuser-Busch alone controls just over 50% of the market share, but there is no indication that Anheuser-Busch (along with SAB Miller and Coors/Molson) have experienced unreasonable gains. Even though concentration is high, there is intense competition in the industry. Competition in the beer industry exists on many different levels. Price, new product innovation, promotional activities, distribution networks, packaging, and brand equity are all different factors in which companies in the brewing industry compete.
With all the competition among brewers, the buyer seems to be in a good position to demand the lowest price. However the brewers combat the pressure for lower prices with product differentiation. If a brewer can convince a consumer that one beer is better than another is, the brewer can charge a higher price for the "better" beer. The product differentiation that exists in the beer market is a little different than in other industries in two ways. First, most people cannot tell the difference between brands of beer.
Second, more expensive brands do not cost proportionally more to make than "economy" beer. Beer's distinction is purely made through promotional activities. The beer industry spends and extraordinary amount on promotional and advertising activities to differentiate brands. But when the beer industry is compared to companies in the beverage industry, such as Pepsi and Coca-Cola, it spends a modest amount. One of the ways promotional activities differentiate brewers from one another is through new product offerings. The new product categories that are introduced by brewers are differentiated as higher quality, if they are than a premium price can be charged.
The cost of developing, promoting, and distributing a brand nationally is often too much for smaller brewers. Which stems back to economies of scale and barriers to entry and the ability of large brewers to block entry from smaller brewers. The market demand for beer is very difficult to measure, because it undergoes many seasonal fluctuations and varies greatly from region to region. Beer has been indicated to have a relatively inelastic demand. With an inelastic demand it would tend to show that brewers could charge whatever they please because the public will not greatly decrease the quantity they consume with an increase in price. Although the brewers could charge whatever they wanted it is apparent to anyone who has bought beer in the last decade that prices are not outrageous.
Over the last four years Greg Hipp of Anheuser-Busch has estimated that the general price of beer has increased 3-5%. It is also estimated that over the next five years that the prices will keep rising at around 2% every year. The brewing industry has enjoyed success over the last decade, but there are still many threats to the industry. The two threats that I will discuss are government involvement and imports. The United States government plays a very important role in the brewing industry on both state and local levels. The federal government pressures the beer industry though the Alcohol Tobacco and Firearms agency.
The ATF is in charge of approving new products and labeling and another one of their major functions is to collect excise taxes from the breweries as well. The federal excise tax rate on a barrel of beer for companies like Anheuser-Busch is $18 per barrel. The brewery must, by law, pay this tax entirely upon leaving the site of production. State excise taxes come in many different shapes and sizes.
States have the ability to charge not only an excise tax but also a tax on wholesalers; private clubs and counties also have a limited ability to collect taxes. The cost of these state taxes is passed on to the consumer and plays an important role in the supply and demand for beer. In many industries it is easy to explain high concentrations if monopolization or oligopolization has occurred through mergers or acquisitions. The brewing industry, with three companies that hold more than 85% of the market, would be a victim of an oligopoly. Between 1950 and 1983 there were about 170 horizontal mergers in the brewing industry. The government stepped in to stop many of the mergers that would have been destructive to the competition in the industry, which is why there was not an increased market share for Anheuser-Busch, Miller, and Coors.
The increase in concentration in the industry is because of internal growth of the companies like Anheuser-Busch, Miller, and Coors. It is most likely that early enforcement of anti merger laws may be responsible for the large internal growth of these companies. Breweries in the U. S. are now facing increasing pressures from other breweries outside the U. S.
The U. S. imports more beer than it exports, like in most industries in the U. S. Over time the beer industry has evolved multiple ways, and due to decreased shipping costs and improved processes it has become a truly global industry. Anheuser-Busch is the largest brewer in the world, but it is not a global brewery.
Heineken, Carlsberg, and Guinness are global brewers with 70% of their volume produced outside of their home country. Imports pose a threat to the market share that companies like Anheuser-Busch, Miller, and Coors have in the domestic market. It should be the domestic industry's top priority to try to merge into the overseas markets. There will be many growth opportunities lost and the potential for other foreign companies to take much of the control of the global market share if the major domestic industry's players do not merge into these markets.
Conclusion Almost a century ago the brewing industry was held to competition among many breweries in small geographic areas. The U. S. brewing industry today is characterized by the dominance of three brewers, which I talked about in this paper. There are many factors today that make the beer industry an oligopoly. Such factors include various advancements in technology, takeovers and mergers, economies of scale, barriers to entry, high concentration, and many other factors covered in this paper.
Over the course of the paper I have tried to define an oligopoly to the best of my knowledge, give a brief history of the brewing industry, and show how the brewing industry today is an oligopoly.