U.S. Brewing Industry Profitability: A Simultaneous Determination of Structure, Conduct, and Performance

Sanjib Bhuyan; Michael McCafferty

doi:10.1515/jafio-2013-0008

Article

U.S. Brewing Industry Profitability: A Simultaneous Determination of Structure, Conduct, and Performance

Sanjib Bhuyan and Michael McCafferty

Published/Copyright: November 6, 2013

Published by

Become an author with De Gruyter Brill

Submit Manuscript Author Information Explore this Subject

From the journal Journal of Agricultural & Food Industrial Organization Volume 11 Issue 1

Abstract

The U.S. brewing industry plays an important role in the U.S. economy. Although the number of firms has increased in the industry, the industry overall has remained very concentrated, with a three-firm concentration ratio of 81% in 2000 (Stack 2000). Increasing concentration in the U.S brewing industry raises public policy concerns due to the potential impact of concentration on market performance and efficiency, for example, the recent decision by the U.S. Department of Justice (DOJ) to block the proposed merger between AB–InBev and Mexico’s Groupo Modelo. Employing an improved version of the structure-conduct-performance (SCP) approach, we examine the relationship between concentration and profitability in the U.S. brewing industry. Our results support the hypothesis that market concentration impacts market performance. We, however, did not address the issue of collusive conduct or market power explicitly.

Keywords: brewing industry; SCP; oligopoly; profitability; market power

JEL Classification: L13; D43

References

Bain, J. S.1956. Barriers to New Competition. Cambridge, MA: Harvard University Press.10.4159/harvard.9780674188037Search in Google Scholar

Bernstein, J., and M. I.Nadiri. 1989b. “Rated of Return on Physical and R&D Capital and Structure of Production Process: Cross Section and Time Series Evidence.” In Advances in Econometrics and Modeling, edited by B.Raj, 169–187. Dordrecht: Kluwer.10.1007/978-94-015-7819-6_12Search in Google Scholar

Cable, J.1972. “Market Structure, Advertising Policy and Interindustry Differences in Advertising Intensity.” In Market Structure and Corporate Behavior: Theory and Empirical Analysis of the Firm, edited by K.Cowling, 105–24. London: Grey-Mills.Search in Google Scholar

Collins, N.R., and L. E.Preston. 1969. “Price-cost margins and industry structure.” Review of Econonomics and Statistics51:271–286.10.2307/1926562Search in Google Scholar

Creeca, D. H.2009. “Light Beer Remains the Heavyweight Brew.” Accessed April 2012. http://www.nightclub.com/beer/light/featured-article-light-beer-remains-heavyweight-brew.Search in Google Scholar

Demsetz, H.1973. “Industry Structure, Market Rivalry and Public Policy.” Journal of Law and Economics16:1–9.10.1086/466752Search in Google Scholar

Doraszelski, U., and S.Markovich. 2007. “Advertising Dynamics and Competitive Advantage.” Working Paper, Hoover Institution, Stanford University.Search in Google Scholar

Dorfman, R., and P.Steiner. 1954. “Optimal Advertising and Optimal Quality.” American Economic Review44(December):826–36.Search in Google Scholar

Dunham, J.2011. “The Beer Institute Economic Contribution Study: Methodology and Documentation.” United States Brewers Association.Search in Google Scholar

Elzinga, K. G.1971. “The Beer Industry.” In The Structure of American Industry, edited by W.Adams, 189–215, 4th ed. New York: Macmillan.Search in Google Scholar

Elzinga, K. G., and A. W.Swisher. 2011. “Developments in US Merger Policy: The Beer Industry as Lens.” In The Economics of Beer, edited by F. M. S.Johan, 196–212. New York: Oxford University Press.10.1093/acprof:oso/9780199693801.003.0011Search in Google Scholar

Gallet, C. A., and P. J.Euzent. 2002. “The Business Cycle and Competition in the U.S. Brewing Industry.” Journal of Applied Business Research18(2):89–96.Search in Google Scholar

Gisser, M.1999. “Dynamic Gains and Static Losses in Oligopoly: Evidence from the Beer Industry.” Economic Inquiry37:554–75.10.1111/j.1465-7295.1999.tb01448.xSearch in Google Scholar

Godfrey, L. G.1978. “Testing Against General Autoregressive and Moving Average Error Models When the Regressors Include Lagged Dependent Variables.” Econometrica46:1293–302.10.2307/1913829Search in Google Scholar

Gokhale, J., and V. J.Tremblay. 2012. “Competition and Price Wars in the U.S. Brewing Industry.” Journal of Wine Economics7(2):226–40.10.1017/jwe.2012.16Search in Google Scholar

Goldschein, E.2011. “Craft Beer Companies That Went from Little to Big Time.” Accessed April 2012. http://www.businessinsider.com/craft-beer-companies-little-to-big-2011-12#11.Search in Google Scholar

Greer, D. F.1971. “Product Differentiation and Concentration the Brewing Industry.” Journal of Industrial Economics19(July):201–19.10.2307/2097426Search in Google Scholar

Greer, D. F.1981. “The Causes of Concentration in the U.S. Brewing Industry.” Quarterly Review of Economics and Business21(Winter):87–106.Search in Google Scholar

Greer, D. F.2002. “Beer: Causes of Structural Change.” In Industry Studies, edited by L. L.Duetsch, 27–58, 4th ed. Armonk, NY: M.E. Sharpe.10.4324/9781315290737-3Search in Google Scholar

Gupta, V. K.1983. “A Simultaneous Determination of Structure Conduct and Performance in Canadian Manufacturing.” Oxford Economic Papers35:281–301.10.1093/oxfordjournals.oep.a041596Search in Google Scholar

Hsiao, C.1997. “Cointegration and Dynamic Simultaneous Equations Models.” Econometrica65(3):647–70.10.2307/2171757Search in Google Scholar

Hulten, C., and F.Wykoff. 1981. “The Measurement of Economic Depreciation.” In: Depreciation, Inflation, and the Taxation of Income from Capital, edited by C.Hulten,81–125. Washington, DC: Urban Institute Press.Search in Google Scholar

IBISWorld.2012. “Breweries in the US.” IBISWorld Industry Report 31212, November 2012.Search in Google Scholar

Iwasaki, N., Y.Kudo, C. H.Tremblay, and V. J.Tremblay. 2008. “The Advertising Price Relationship: Theory and Evidence.” International Journal of the Economics of Business15(2):146–67.10.1080/13571510802134213Search in Google Scholar

Iwasaki, N., B. J.Seldon, and V. J.Tremblay. 2008. “Brewing Wars of Attrition for Profit (and Concentration).” Review of Industrial Organization33:263–79.10.1007/s11151-008-9189-5Search in Google Scholar

Jones, D.2011. “Dealtalk: AB InBEV Seen Brewing up Final Mega Deal.” Accessed May 21, 2012. http://www.reuters.com/article/2011/09/26/us-brewing-idUSTRE78P2TK2011026.Search in Google Scholar

Kambhampati, U. S.1996. Industrial Concentration and Performance. Delhi: Oxford University Press.Search in Google Scholar

Keithahn, C. F.1978. The Brewing Industry. Washington, DC: Bureau of Economic Research.Search in Google Scholar

Kerkvliet, J. R., W.Nebesky, C. H.Tremblay, and V. J.Tremblay. 1998. “Efficiency and Technological Change in the U.S. Brewing Industry.” Journal of Productivity Analysis10:271–88.10.1023/A:1018615305725Search in Google Scholar

Kesmodel, D.2009. “US Beer Imports Lose Their Fizz.” Accessed April 2012. http://online.wsj.com/article/SB123939374323709241.html.Search in Google Scholar

Kirin Institute of Food and Lifestyle Report Vol. 29. 2010. “Global Beer Consumption by Country in 2009.” Accessed May 21, 2012. http://www.kirinholdings.co.jp/english/news/2010/1222_01.html#table3.Search in Google Scholar

Kwoka, J. E.1977. “Large Firm Dominance and Price-Cost Margins in Manufacturing Industries.” Southern Economic Journal44:783–9.10.2307/1057315Search in Google Scholar

Lynk, W. J.1984. “Interpreting Rising Concentration: The Case of Beer.” The Journal of Business57(1):43–55.10.1086/296223Search in Google Scholar

Mann, M. H.1970. “Asymmetry, Barriers to Entry, and Rates of Return in 26 Concentrated Industries.” Western Economic Journal8:86–9.Search in Google Scholar

Martin, S.1979. “Advertising, Concentration and Profitability: The Simultaneity Problem.” Bell Journal of Economics10:639–47.10.2307/3003355Search in Google Scholar

Miller, R.1967. “Marginal Concentration Ratios and Industry Profit Rates.” Southern Economic Journal34:259–68.10.2307/1055042Search in Google Scholar

Mueller, W. F., and R. T.Rogers. 1980. “The Role of Advertising in Changing Concentration of Manufacturing Industries.” Review of Economic Statistics62:89–96.10.2307/1924276Search in Google Scholar

OECD. 2001. Measuring Capital – OECD Manual: Measurement of Capital Stocks, Consumption of Fixed Capital and Capital Services. Paris: OECD.10.1787/9789264193260-enSearch in Google Scholar

Orenstein, S. I.1981. “Antitrust Policy and Market Forces as Determinants of Industry Structure: Case Histories in Beer and Distilled Spirits.” Antitrust Bulletin26(2):281–313.10.1177/0003603X8102600204Search in Google Scholar

Peles, Y.1971. “Economies of Scale in Advertising Beer and Cigarettes.” Journal of Business44:32–7.10.1086/295330Search in Google Scholar

Pepall, L., D.Richards, and G.Norman. 2002. Industrial Organization: Contemporary Theory and Practice. New York: South-Western College Publishing.Search in Google Scholar

Pipoblabanan, C.2008. “Essays on Parametric and Nonparametric Estimation of Market Structure and Tax Incidence in the U.S.Brewing Industry.” Ph.D. Thesis, Oregon State University.Search in Google Scholar

Porter, M. E.1976. “Interbrand Choice, Media Mix and Market Performance.” American Economic Review66:398–406.Search in Google Scholar

Porter, M. E.1979. “The Structure within Industries and Companies’ Performance.” Review of Economics and Statistics61:214–27.10.2307/1924589Search in Google Scholar

Resende, M.2007. “Structure, Conduct and Performance: A Simultaneous Equations Investigation for the Brazilian Manufacturing Industry.” Applied Economics39:937–42.10.1080/00036840500461949Search in Google Scholar

Rojas, C.2008. “Price Competition in U.S. Brewing.” Journal of Industrial Economics61:1–31.Search in Google Scholar

Slade, M.2004. “Market Power and Joint Dominance in U.K. Brewing.” Journal of Industrial Economics52:133–63.10.1111/j.0022-1821.2004.00219.xSearch in Google Scholar

Stack, M.2000. “Local and Regional Breweries in America’s Brewing Industry.” Business History Review74:435–63.10.2307/3116434Search in Google Scholar

Stiegert, K., S. S.Wang, and R.Rogers. 2009. “Structural Change and Market Power in the U.S. Food Manufacturing Sector.” Agribusiness25(2):164–80.10.1002/agr.20193Search in Google Scholar

Stigler, G.1964. “A Theory of Oligopoly.” Journal of Political Economy72:44–61.10.1086/258853Search in Google Scholar

Strickland, A., and L.Weiss. 1976. “Advertising, Concentration, and Price Cost Margins.” Journal of Political Economy84:1109–21.10.1086/260499Search in Google Scholar

Sutton, J.1991. Sunk Costs and Market Structure: Price Competition, Advertising, and the Evolution of Concentration.Cambridge, MA: MIT Press.Search in Google Scholar

Toscano, P.2010. “The Biggest US Craft Breweries.” Accessed March 2012. http://www.cnbc.com/id/39233398/The_10_Biggest_US_Craft_Breweries.Search in Google Scholar

Tremblay, V. J.1987. “Scale Economies, Technological Change, and Firm Cos Asymmetries in the U.S. Brewing Industry.” Quarterly Review of Economics and Business27(Summer):71–86.Search in Google Scholar

Tremblay, V. J., and C. H.Tremblay. 1988. “The Determinants of Horizontal Acquisitions: Evidence from the U.S. Brewing Industries.” Journal of Industrial Economics37:21–45.10.2307/2098551Search in Google Scholar

Tremblay, V. J., and C. H.Tremblay. 1995. “Advertising, Price, and Welfare: Evidence from the US Brewing Industry.” Southern Economic Journal62(2):367–81.10.2307/1060689Search in Google Scholar

Tremblay, V. J., and C. H.Tremblay. 2005. The US Brewing Industry: Data and Economic Analysis. Cambridge, MA: MIT Press.Search in Google Scholar

Tremblay, V. J., and C. H.Tremblay. 2012. New Perspectives on Industrial Organization: With Contributions from Behavioral Economics and Game Theory. New York: Springer Publishing.10.1007/978-1-4614-3241-8_4Search in Google Scholar

Tremblay, V. J., N.Iwasaki, and C. H.Tremblay. 2005. “The Dynamics of Industry Concentration for U.S. Micro and Macro Brewers.” Review of Industrial Organization26:307–24.10.1007/s11151-004-8114-9Search in Google Scholar

U.S. Brewers Association. 2011. Brewers Almanac, Brewers Association (1980–2009). Washington, DC.Search in Google Scholar

U.S. Department of Commerce. 2011. “Bureau of Economic Analysis.” National Income in the United States, 1980–2009. Washington, DC.Search in Google Scholar

U.S. Department of Commerce. 2012. “Bureau of the Census.” Annual Survey of Manufacturers 1980–2009. Washington, DC.Search in Google Scholar

U.S. Department of Commerce. 2013. Manufacturing: Summary Series: General Summary: Industry Statistics for Industry Groups and Industries: 2007. Bureau of the Census. Accessed March 18, 2013. http://www.census.gov/econ/industry/ec07/a312120.htm.Search in Google Scholar

U.S. Department of Justice. 2010. Merger Guidelines. Accessed April 2012. http://www.justice.gov/atr/public/guidelines/hmg-2010.pdf.Search in Google Scholar

U.S. Government Accountability Office. 2009. Agricultural Concentration and Agricultural Commodity and Retail Food Prices, GAO-09-746r, June 30. Accessed March 18, 2013. http://www.gao.gov/assets/100/96258.pdf.Search in Google Scholar

Waldman, D. E., and E. J.Jensen. 2013. Industrial Organization: Theory and Practice, 4th ed. Upper Saddle River, NJ: Pearson.Search in Google Scholar

Wall Street Journal (WSJ).2013. “U.S. Sues to Block Big Beer Merger.” written by Brent Kendall and Valerie Bauerlein. January 31, Thursday.Search in Google Scholar

Wooldridge, J.2003. Introductory Econometrics: A Modern Approach. Cincinnati, OH: Thomson South-Western.Search in Google Scholar

Xia, Y., and S. B.Buccola. 2003. “Factor Use and Productivity Change in Alcoholic Beverage Industries.” Southern Economic Journal70(1):93–109.Search in Google Scholar

1
For a background on the SCP approach, see Chapter 6, “Empirical Industrial Organization,” in Waldman and Jensen (2013).
2
According to the U.S. Department of Justice’s merger guidelines, an industry is considered “moderately concentrated” if the HHI exceeds 1,500; it is “unconcentrated” if the HHI is below 1,500 (U.S. Department of Justice 2010).
3
Because HHI accounts for the mean and variance of firms in the industry thereby accounting for both the number and size distribution of firms within an industry, we highlight the use of HHI index to measure market concentration in the U.S. brewing industry. For comparison with other highly concentrated industries, the HHI’s for cigarettes, breakfast cereals, and automobiles were 3,100, 2,446, and 2,506, respectively. The average index for all manufacturing industries is 91 (U.S. Department of Commerce 2012).
4
Similar conclusions were made in more recent studies, such as Slade (2004) and Rojas (2008).
5
It should be noted that there have been more than 200 horizontal mergers in the brewing industry since 1950 (Tremblay and Tremblay 2005, 187–203). This would lead one to believe that this has been a significant factor in the increase in concentration in the industry. However, macro-brewer mergers have been the exception in terms of merging and not the norm. Tremblay and Tremblay (1988) find that most mergers had little effect on the size of the major macro-brewers and therefore had little effect on industry concentration.
6
For a more detailed discussion of the SCP approach, its critics, and other approaches in industrial organization, please see chapter 1 of Tremblay and Tremblay (2012).
7
We thank one of the reviewers for constructive comments that helped strengthen this section.
8
MES is commonly used as a proxy for technological advancement in the manufacturing industry because technological change in the industry required greater automation (by firms) and economies of scale in production. Thus, MES is a measurement of scale economies. Examples of earlier studies using MES as a proxy for technological change include Iwasaki, Seldon, and Tremblay (2008) and Steigert, Wang, and Rogers (2009).
9
Interpolation of variables was done by regressing a time variable on each variable to be interpolated, i.e., once the parameters were estimated, the missing data were interpolated as a function of time. An example of the procedure is as follows:.
10
Data used in this study will be made available as per journal policy.
11
For additional details on the 2SLS (and 3SLS) approach see Wooldridge (2003).
12
We thank a reviewer for suggesting that we address the issue of robustness of our results.
13
This follows the following: A is total industry advertising, PQ is value of shipments, and δ is the elasticity of output demand with respect to advertising. This indicates that advertising to sales increases with the profitability or the Lerner index, .
14
On the other hand, we can expect to see a positive impact of advertising on profitability when advertising is “constructive” because such advertising increases market demand by attracting new customers and benefits all firms in the market (Tremblay and Tremblay 2012, chap. 15).

Published Online: 2013-11-06

You are currently not able to access this content.

Articles in the same Issue

https://doi.org/10.1515/jafio-2013-0008

Keywords for this article

brewing industry; SCP; oligopoly; profitability; market power