Keeping Beer Prices Low

Last week, Planet Money ran a story about how beer monopolies in the U.S. affect what we pay for beer. Adam Davidson followed up on that story today in print for the Times Magazine:

For decades, they argue, Anheuser-Busch has been employing what game theorists call a “trigger strategy,” something like the beer equivalent of the Mutually Assured Destruction Doctrine. Anheuser-Busch signals to its competitors that if they lower their prices, it will start a vicious retail war. In 1988, Miller and Coors lowered prices on their flagship beers, which led Anheuser-Busch to slash the price of Bud and its other brands in key markets. At the time, August Busch III told Fortune, “We don’t want to start a blood bath, but whatever the competition wants to do, we’ll do.” Miller and Coors promptly abandoned their price cutting.

The trigger strategy, conducted in public, is entirely legal. In fact, it’s how airlines, mobile- phone companies and countless other industries keep their prices inflated. Since that dust-up in the late ’80s, the huge American beer makers have moved in tandem to keep prices well above what classical economics would predict. (According to the logic of supply and demand, competing beer makers should pursue market share by lowering prices to just above the cost of production, or a few cents per bottle.) Budweiser’s trigger strategy has been thwarted, though, by what game theorists call a “rogue player.”

That rogue player—the company that Planet Money deemed a “maverick”—is Mexico’s Grupo Modelo, which owns the popular Corona brand. When Budweiser tries to raise its prices, Corona does not—which encourages the other beer companies to keep their prices just as low. Anheuser-Busch InBev wants to buy Grupo Modelo so that it can raise prices all all its beers without worrying that beer drinkers will flock to the cheaper beer, and because of this, the Justice Department has stepped in to stop the merger (the Justice Department has also blocked the mergers of AT&T and T-Mobile, but is okay with American Airlines and US Airways merging to compete with Delta). Our beer prices remains safe for now.

Photo: Paul Lowry

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8 Comments / Post A Comment

So cheap Corona or pricier Bud? In game theory this is called “the piss-drinker’s dilemma.”

limenotapple (#1,748)

I’m kind of curious if beer prices are different in different regions of the country. I can’t comment on the price of either Bud or Corona, since, outside of professional events where I didn’t have a choice, I haven’t bought either in some time.

I usually buy a six pack of Schlafly long necks. It costs me between 6.99 and 7.99 depending on if it’s on sale.

@limenotapple I’m still hoping to listen to this episode, which is loading properly on my phone for some reason, but I think beer prices at bars tend to vary much more than beer prices at stores, with the latter probably driven largely by local taxes.

In my experience beer also tends to actually be pretty pricey in other countries, especially relative to other drinks. In former Soviet countries, beer is often more expensive ounce-per-ounce than vodka — at one bar I used to frequent, a pint of cheap beer cost almost twice as much as a shot of vodka and a glass of Coke. Even in beer-loving England, I found that cans of lager at the store were rarely less than a pound, compared to £2-6 per pint at the pub. So the overall price is the same or perhaps a bit higher than in the US, while the shop vs. bar differential is considerably lower (I can buy a six pack of DC Brau for $11, while a single can costs about $6 in most bars. A six pack of Yuengling is $6-9 compared to $3-5 per pint at the bar.)

deepomega (#22)

@limenotapple My experience is that beer prices change dramatically across the country – both in bars and in stores. Bars will have a bigger swing in price, but there’s still a price gap even buying a six pack. My hunch is that this is also driven by microeconomies of beer – small breweries selling more cheaply the closer you get to them, different amounts of beer competition, etc.

Logan! Pay someone to drive to every state and comment on the price of beer!

@deepomega I VOLUNTEER

@limenotapple I ALSO VOLUNTEER.

and also will be unemployed in 3 weeks and will therefore also be 100% available!

lizard (#2,615)

@limenotapple totally different. its different even from store to store. in nj i can get some cheap beer at wegmans but it nyc its pricier.

ok, but why is beer so pricey in canada?!? relative to the us? (I know why: taxes. Which I am happy to pay. But seriously, I hardly drink anymore.)

(On a side note, I never feel more American than when I bitch about how much things cost in Canada. Which I try not to do. But it happens.)

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