Last week, the Department of Justice sued to block the merger of Anheuser Busch InBEV (“ABI”) and Grupo Modelo (“Modelo”). The coming battle between the antitrust agency and the merging parties could raise several important issues for merger review, including the role of entrants (craft beer makers) and negative externalities (associated with consuming beer).
ABI, the maker of Bud, Bud Light, and Busch, already owns 35 percent of Modelo; the DOJ’s lawsuit seeks to keep ABI’s share right there. For those who haven’t carefully studied the back of their Mexican beer bottles, Modelo is the maker of popular Mexican imports such as Corona Extra, Corona Light, and Pacifico.
ABI’s “partial ownership” of Modelo is no small detail; it complicates the DOJ’s analysis relative to a garden-variety merger analysis. Writing in the Antitrust Law Journal, Salop and O’Brien explain that the “competitive effects of partial ownership depend critically on two separate and distinct elements: financial interest and corporate control.” Depending on those variables, partial mergers “can occur in ways that result in greater or lower harm to competition than a complete merger.” The implication of their finding is that a movement from a partial merger to a complete one could raise or lower prices.
The DOJ’s complaint doesn’t tell us much about the nature of ABI’s existing control over Modelo, except for noting that ABI’s annual report claims that ABI does not have “effective control” over Modelo. Despite this disclaimer and despite the “firewalls” designed to prevent ABI members of Modelo’s board learning about pricing information, it is possible that ABI exerts some influence over Modelo’s decision-making. Setting aside the degree of ABI’s control over Modelo’s prices, economic theory predicts that ABI’s financial interest in Modelo could affect ABI’s prices. The question is whether a full transfer of ownership would really make things worse.
The DOJ’s primary theory of harm is that the merger would facilitate coordinated pricing between ABI and MillerCoors, the second largest beer manufacturer in the United States. According to the complaint, ABI and MillerCoors have been forced to discount their prices to discourage consumers from “trading up” to Modelo brands; take away Modelo’s aggressive pricing and the industry leaders could better coordinate their price increases. Secondarily, the DOJ argues that the merger would permit ABI to unilaterally raise its prices without concern about customer defection to Modelo’s brands.
One bone of contention between the dueling antitrust experts will be the likely role of “craft beers” or microbrews in the coming years. To the extent that craft beers play a larger role in the near future—one estimate suggests that craft beers currently account for six percent of all sales but are growing at 13 percent—then a merger of two “low-end” labels is not as important for consumers. According to the Brewers Association, there were 2,000 U.S. breweries in operation by the end of 2012, and there are another 1,000 in the planning stage; the expansion of microbreweries suggests a “shift in the palate” of U.S. beer consumers toward craft beers. With this backdrop, the combination of two low-end brands might not generate much pricing power.
To be fair, ABI has some high-end labels, such as Stella Artois and Beck’s, and craft beers such as Goose Island and Shock Top. But these brands are drowned out in a sea of differentiated flavors, including popular brews such as Abita, Lagunitas, and Shiner. There is an exciting microbrew story in nearly every state—for example, you can’t visit the Blue Ridge region of Virginia without stopping at Devils’ Backbone (Roseland) or Blue Mountain Brewery (Afton).
The DOJ’s discussion of the proposed “relevant product market” is good reading. Apparently, ABI’s Bud Light Lime-a-Rita sits within the “premium plus” category. Where I come from, serving a margarita in an aluminum can is blasphemy. The agency asserts that all segments of the beer industry—from the “sub-premium” segment to “high-end”—compete in the same product market: Query whether sub-premium beers or even the “premium” segment are not constrained by the price of water, the closest available substitute. Craft beers are mentioned in passing only.
The key demographic for low-priced beer drinkers is blue-collar males in their 20s, who might shy away from the premium prices commanded by craft beers. Presumably, the DOJ’s lawsuit aims to protect these drinkers. Given the negative externalities associated with consuming alcohol, however, the movement to higher priced, heavier-tasting, craft beers that are not guzzled like Mad Dog might not be a bad thing. Which leads to one to wonder: Should the supply of beer be competitive or should we tolerate a little market power along with reduced levels of consumption?
If the DOJ has its way and blocks this merger—and if the agency is right about the likely price effects—then we will get more alcohol consumption relative to a world in which ABI owns 100 percent of Modelo. Be careful what you wish for.