It's that time of year again. No, not the holidays or even back to school, but rather a time enjoyed by almost all American males and a majority of my female friends - football season. Everyone has his or her favorite team. Whether it is college or professional, a hometown or just a favorite color, students watch the games. The fraternity guys post up in front of their big screens Saturday and Sunday afternoons to cheer, yell and often, to enjoy a cold one. Most have a preferred beverage of consumption during these games, but many may see the price rise on their Bud Light or Miller High Life.
In July 2008, Anheuser-Busch approved Belgian-Brazilian based InBev offer of $52 million to buy the American brewery, creating the world's largest beer maker. In 2007, SABMiller and Molson Coors Brewing Company merged to create MillerCoors, it was approved in 2008 by U.S. antitrust regulators. In June, MillerCoors reported a 75 percent increase in second-quarter profit, with an earnings increase of 16 percent, according to http://www.wsj.com.
Before these mergers, Anheuser-Busch met 48.5 percent of the demand for beer, with Miller meeting 18.3 percent and Coors almost 11 percent.
From June 2008 to June 2009, beer, ale and other malt beverages at home prices increased 4.4 percent, according to the U.S. Bureau of Labor Statistics. This increase in beer prices came at a time when the average rate of inflation actually fell.
So, why the rising beer prices?
Some have argued the increased concentration in the industry has many characteristics of an oligopoly, a market structure in which an industry is dominated by a few large firms. They gain dominance of the industry and eventually learn how to compete by not competing with each other. One company sets a price for their domestic beer and the others follow. Companies don't lower their prices to increase market share because the others would do the same, and the gain would only be temporary. They recognize if they lower their prices other will follow and it will only be a temporary gain. Instead, they all come to an understanding that it is better not to compete in prices.
So if they aren't competing in prices, they are at least creating a better product and being more innovative, right?
Not necessarily.
If the companies realize prices changes would be only temporarily gains, they may also believe so would product changes. If one brewery spends resources - both labor and capital - to develop a new, better tasting beer, the other will follow suit.
This can be seen by the creation of low calorie beers- targeted at the health conscious female (and most Miami University males). MillerCoors released "MGD 64," 64 calories and 2.4 grams of carbohydrates per 12 ounces and 2.8 percent alcohol by volume in 2008. Less than a year later, Anheuser-Busch has released their "Budweiser Select 55," with 55 calories and 1.9 grams of carbohydrates. Well, these products are slightly different - nine calories and half a gram of carbohydrates, most females don't treat them like different products. These short lived gains from innovation extend beyond the carb-conscious drinker. Miller Chill was introduced to compete with the popular Bud Light Lime, both now indistinguishable by most.
It may only be a matter of time before these two large companies realize their gains are only temporary and instead of working harder to be the most innovative and creative, they will compete by not competing. By recognizing interdependence, companies may develop a truce and mutual understanding not to compete in price or innovation. College students can only hope these companies don't make all their decisions based off this interdependence and continue to work to lower prices or make a better product worth the higher price.
Anheuser-Busch may argue it had to merge in order to stay competitive in the market, following the integration of Miller and Coors, and while U.S. antitrust officials approved the merger, beer drinkers must hope this doesn't start a trend. The success of these mergers and their increased profits may encourage smaller microbreweries to consider merging. They don't want to get left behind. The narrowing beer market may worry these small breweries into finding bigger companies to buy them and help distribute their product or merge together, both options further concentrating the industry, and leading to potentially higher prices.
Hopefully students will continue to be able to count on Skipper's for their dollar drafts on Wednesday.
