The U.S. Department of Justice wants to protect your ability to buy cheap beer. At least, that’s what it’s claiming to do in its January lawsuit to block a merger between brewers Anheuser-Busch InBev (ABI) and Grupo Modelo. The DOJ says the merger between the two large companies would stifle competition, increase prices, and reduce product innovation in America’s beer market. However, the suit ignores the ever-increasing vibrancy of the U.S. alcohol market and consumers’ ability to “vote with their dollars.” If we truly want to encourage innovation in the beer market, we ought to pursue ways to liberate small brewers and wholesalers rather than thwart the growth of larger breweries.
Reading the DOJ’s case against the proposed merger, one might think Anheuser-Busch InBev and Grupo Modelo control most of U.S. beer sales. In fact, the Belgian-Brazilian-owned ABI and Mexico’s Grupo Modelo — which produces several brands including Corona, Modelo, and Pacifico — together represent around 43 percent of U.S. beer sales. ABI is the largest beer company in the U.S., followed by MillerCoors. Grupo Modelo is the third largest. Yet as big as these beer giants are, they’ve seen their American market share shrink as craft brewers have grown in popularity. In 1978, there were only 42 breweries in the United States; by 2011, there were almost 2,000, with hundreds more in the planning stages, according to the Brewers Association. In 2007, craft beer accounted for 3.8 percent of beer sales; by 2012 that share had risen to over 5 percent.
So how can the DOJ argue that there is a near beer monopoly in this country? As The Wall Street Journal noted recently, the DOJ determines the level of competition or concentration within a market by measuring firms’ size compared to the market based on a metric known as the Herfindahl Index (HHI). The problem in applying the HHI to America’s beer market is that consumers can choose not only between a multitude of beer brands, but also other alcohol beverage options, including wine and spirits.
According to the DOJ, Grupo Modelo has gained market share by not raising its prices in line with ABI and other large U.S. breweries. This has prevented ABI from raising its prices too high too fast for fear that loyal Bud Light drinkers might trade up to the more expensive Corona if the prices were too close. It is true that were ABI to fully own Grupo Modelo (it already owns part of the company), the price of a Corona might increase, but it would make little sense for ABI to significantly raise the prices of either Corona or its other brands, as that would risk consumers switching to other options, including craft beer, which is already close in price to Corona. Indeed, more and more beer drinkers are ditching their traditional light American lagers for the diversity of options found among craft brews.
Instead of trying to prevent this change, ABI and other large brewers are embracing and attempting to capitalize on it. In 2011, ABI bought Goose Island Beer Co, a highly respected and popular Chicago-based craft brewery. Some observers feared that ABI would “kill” Goose Island by reducing its quality, but more than a year later, the consensus among drinkers is that the quality has remained the same — and even improved by some accounts. In fact, ABI expanded production at Goose Island’s Chicago facility and began to market and distribute its beers throughout the country, giving consumers far beyond Chicago more choices. It would make little sense for ABI to do anything different if it were to merge with Grupo Modelo.