Thesis on "Economic Analysis of Competition Within a Specific Oligopoly Market Beer Industry"

Thesis 3 pages (1005 words) Sources: 5 Style: APA

[EXCERPT] . . . .

Beer Industry

Despite the recent spate of small brewery openings and a dramatic increase in the import business, in many ways the beer industry remains an oligopoly. The industry is dominated by a small handful of firms. With the exception of a couple of major imports (Heineken, Corona), these firms (SABMiller, a-B InBev, Coors) are the only players to serve the mass market. The big three of American brewing had a combined market share of 77.7% in 2007 (Progressive Grocer, 2008).

Competition in the beer industry has been largely driven by brand-building. Brewers spend hundreds of millions of dollar building brands, then extending them. Some extensions, such as Bud Light, have essentially become independent brands in their own right, spawning extension families (Reuters, 2009). Brewers protect against price competition by segmenting their brands into categories based on price -- standard, premium and superpremium. The flagship brands are priced at the premium level. This keeps price competition away from the biggest brands, although many of the beers in the standard segment are among the top sellers in the country.

Pricing in the beer industry is driven largely by factor costs. Raw ingredient costs, such as those for barley, hops, corn and rice, are the main drivers in beer prices (CBS, 2008). The large brewers seldom engage in price competition with one another. They prefer to price based on market segments. If any price competition is conducted, it is in these segments. In the higher-end segments, margins are tightly controlled and the industry succeeds based on high volume sales.

Price elasticity in the beer market is unique. Microbrewers generally have low price elasticity. Imports have reverse price elasticity. The premium prices charged by imports help to drive their sales by enhancing the prestige value of those products. These elasticities are incongruous with the beer market overall, however. In the mass market segments, it has been shown that elasticity for beer is -0.3 (Chaloupka, et. al. 2002). This is lower than the elasticity for other alcohol products, but reflects that consumers will decrease consumption as prices increase.

This has a significant impact on beer producers in a couple of key ways. One is that beer producers must constantly work to hold the line on costs. Price increases result in a loss of business; yet price increases are often a result of changes to the tax regime. Thus, beer producers have limited ability to increase prices on their own, particularly in years where the beer tax is increased. As a result, beer producers must constantly walk a tight line, especially when factor costs are increasing. Some companies have vertically integrated in order to gain better control over factor costs, Anheuser-Busch in particular.

The other impact is that consumers trade down from premium brands to standard brands (CBS, 2008). The financial crisis has convinced drinkers in some markets, such as California and Florida, to trade down as a result of lower incomes. This changes the dynamic of competition because the standard brands received substantially lower promotional budgets… READ MORE

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