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.)