Do antitrust lawyers drink beer, or for that matter grocery shop? Those questions come to mind after watching the U.S. Justice Department trot out its traditional pseudo-science to block a brewery merger. Last week the government filed an antitrust suit to prevent Budweiser maker Anheuser-Busch InBev from buying the half of Grupo Modelo that it doesn't already own. Based in Mexico, Modelo brews Corona Extra and other brands.
Antitrust law is allegedly to prevent firms from exercising monopoly power to abuse customers. But antitrust enforcers have difficulty finding actual monopolies. So they end up attacking proposed mergers like the AB-Modelo tie-up, in which the resulting company would serve all of 46% of the U.S. beer market.
For decades, the ingredient that has given the antitrust brew its bitter aftertaste is something called the Herfindahl-Hirschman Index (HHI). By squaring the market shares of each competitor before adding them together, it purports to show how concentrated the market is in the hands of a few large players. Some might wonder why lawyers cannot simply look at the actual market shares as they exist.
In any case, government attorneys present HHI scores as if they express scientific certainty that customers will be abused, while economists are often more skeptical. That's because the scores can be manipulated depending on how the lawyers define the relevant market.
By cherry-picking particular U.S. markets, the current Justice suit suggests that the beer merger would result in unacceptably high HHI scores. It's a strange time to forecast a lack of competition, because this happens to be the golden age for independent U.S. breweries. The U.S. added 442 new brewers last year for an all-time high of 2,751, according to the Beer Institute trade association.
But amid this brewery boom, Justice sees only scarcity. The suit argues that the merger will allow Anheuser to raise prices on its existing Budweiser and Bud Light brands by also raising the price of Corona and Corona Light.
The lawsuit quotes from internal Anheuser communications suggesting that executives are upset that as Bud has been raising prices lately, Corona hasn't followed suit. Bud tends to appeal to a different consumer than the higher-priced Corona. But a shrinking price differential between them has apparently induced some Bud drinkers to trade up to Corona. If one company owns both brands, government lawyers imagine that it will raise prices on both. Bud will stop losing market share, Corona will make even more money and consumers will lose.
But won't this create for the new company the same problem that Justice claims is motivating this deal in the first place? Just as Bud's price hikes today may drive consumers toward Corona, future price increases will drive consumers toward other brewers.
Justice argues that top rival MillerCoors tends to raise its prices along with Anheuser. But if that happens in the future, other competitors can take the opportunity to pick up new customers. There are few barriers to entry in the beer market. Brewing is a mature technology, to say the least.
The biggest barriers are the marketing budgets at Anheuser and Miller. But Heineken also has a marketing budget for its namesake brand, as well as its other brands including Amstel and Dos Equis. Sam Adams and Diageo's Guinness also seem capable of getting the word out to thirsty consumers. At a lower price level and without much advertising, brands like Pabst help keep Bud and Miller honest. And then there are the myriad craft brews.
But even with a supermarket aisle of beers to choose from, there's no law of economics that says consumers have to choose any of them. To demonstrate market concentration, Justice has conveniently identified the relevant market as the beer market, while the brewers are all competing in the larger market of alcoholic beverages. Beer has been losing market share on this wider playing field for a decade or more. Fruity vodkas and tequilas have lately been creating new consumers for hard liquor.
Americans don't always drink beer. But when they do, they'll enjoy plenty of alternatives without any help from the world's least interesting lawyers who populate the Justice Department Antitrust Division.
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