Nov 15, 2012

Roll Out The Barrel

The most recent Washington Monthly has an interesting piece by Tim Heffernan about consolidation and vertical integration in the booze industry and what he believes it means for alcohol consumption.  As a history buff, I found his review of the history of the beer industry interesting.  Unfortunately, as an antitrust lawyer and an armchair economist, I can’t say the same for his economic analysis.

His hypothesis is that beer and other alcoholic beverages are too cheap in the UK due to vertical integration (into what he calls “monopolies”) and that these low prices lead Britons to over-consume.  He then warns that horizontal consolidation may lead to similar problems in the U.S., while noting that the 21st Amendment has allowed states to outlaw vertical integration.

There is much there that is confused. To begin with, the story he tells makes the case for the deals he seems to want to condemn.  There is near universal agreement that the goal of antitrust is to protect consumers by promoting economic efficiency.  That means deals that lead to reduced prices and increased output do not run afoul of the antitrust laws.  Indeed, that’s the whole point of having an efficiencies defense.  Those are the effects robust competition, not a lack of competition.

His use of the word “monopoly” is similarly misguided.  Perhaps it’s just confused word choice, but again, a monopoly, at least a profit maximizing one, does not increase output and drive down prices.  It does exactly the opposite.  To steal a chart from an old DOJ report:

I’ll spare you all the details and just say that competition drives prices down toward marginal costs (i.e., the cost of making one additional unit).  A lack of competition allows the monopolist to reduce supply and trade additional customers for higher prices.

Similarly confused is his view of vertical integration.  Unlike horizontal combinations (i.e., combinations of competitors), there is nothing inherently competition-reducing about vertical integration. That is, a vertical transaction does not leave the market with one less competitor.  At most, it means one less link in the distribution chain, which can be a good thing.  It can raise antitrust issues, but when it does it is because the newly integrated supplier can foreclose others.  Either its strong position in distribution means it can keep other suppliers out or its control of production means it can foreclose other distributors.  If, for example, a brewer’s control of a distributor or a retailer would prevent other brewers from serving the market, that’s an antitrust issue. It would mean the vertically integrated brewer could raise prices and reduce output because it can foreclose competition.  But again, it seems to be the pro-competitive cost reductions that are the source of Heffernan’s complaints, not the loss of any competition.

None of which is to say that the underlying premise isn’t ripe for public policy.  It may be that booze is too cheap and making it more expensive would be a wise policy choice.  It’s just not antitrust policy.

Moreover preventing economically efficient consolidation or vertical integration is a very poor way of achieving the policy goals of reducing consumption.  It may raise the price of alcohol, but it does so by creating opportunities for rent seeking among producers, distributors and retailers.  That’s good for those industry participants, but it’s bad public policy.

If you want to reduce consumption via higher prices, Pigovian taxation is the way to go.

(Disclosure: I was a very small part of the team of antitrust lawyers advocating on behalf of the MillerCoors joint venture.)

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5 Comments

  • Thanks for the follow up to the Washington Monthly article. One effect that the author didn’t mention is the ability of the distributors to require you to carry brands. A friend of mine in Greenville, South Carolina owns a great beer bar called Barleys. After the InBev merger the local distributor came by and said that if they wanted certain Belgian beers, they would have to stock Budweiser and Stella on order from InBev. It’s certainly within the distributors’ right to request that, and my friend’s right to tell them to go screw themselves, but at what point does it become an anti-competitive? (And you don’t raise the price until you’ve driven the competition out, a la Walmart in the small town I lived in in Virginia)

    • Hefferenan’s hypothesis — that “vertical monopolies” have led to lower prices and thus more drinking in the UK — does not seem to rely on higher future prices.

      But you are right that where low prices become an antitrust issue (which is relatively rare) is when a party with market power prices below cost to harm competitors with the expectation of being able to recoup the losses with future price increases. Whether that’s ever a realistic expectation is a subject of significant dispute among the antitrust bar.

      Requiring the purchase of one product to get access to another — which we call tying — is a different issue that perhaps I will cover in a future post.

  • I look forward to a follow up and have added you to my RSS feed. Thanks.

  • Adam,

    Perhaps the choice of the word ‘monopoly’ wasn’t correct, but something to consider here is that drawing higher prices in a monopolistic environment is a choice to be made by the monopolists.
    What if the monopolists chose not to draw higher prices?

    Tks

    • I guess it’s theoretically possible that a monopolist would chose out of altruism not to maximize its profits, but I’m not sure it matters.

      Heffernan’s hypothesis is that the market power he believes to be present is causing lower prices and more output. That’s just wrong. If there are lower prices and higher output, some factor other than market power is causing it.

      But at least in the U.S., it’s not illegal to be a monopoly, only to abuse your monopoly power.

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Adam Miller

Adam Miller Adam is of counsel at Fredrikson & Byron specializing in antitrust. In addition to handling merger notifications, reviews and challenges, his practice focuses on advising clients on the full range of antitrust and competition law. His experience includes advocacy before the U.S. Department of Justice, Federal Trade Commission and foreign competition authorities; defense of criminal and civil government investigations; litigating civil damages actions involving monopolization, cartelization or other anticompetitive conduct; representation of companies and individuals in grand jury investigations; and counseling clients on antitrust compliance.

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