Price Leadership in the Beer Market

InBev’s St. Louis production line for Stell Artois beer. Photo from the Wall Street Journal

Firms in an oligopoly can increase their profits by agreeing with other firms in the industry on what prices to charge. Explicit price fixing violates the antitrust laws and can subject the firms involved to fines of up to $100 million and executives at the firms to fines of up to $1 million and prison terms of up to 10 years. Despite these penalties, the rewards to avoiding price competition are often so great that firms look for ways to implicitly collude—that is, to arrange ways to coordinate their prices without violating the law by explicitly agreeing on the prices to charge. (We discuss the antitrust laws in Microeconomics and Economics, Chapter 15, Section 15.6.) 

One way for firms to implicitly collude is through price leadership. With price leadership, one firm in the industry takes the lead in announcing a price change that other firms in the industry then match. (We briefly discuss price leadership in Microeconomics and Economics, Chapter 14, Section 14.2.)

In their classic industrial organization textbook, F.M. Scherer of Harvard’s Kennedy School and David Ross of Bryn Mawr College summarize the legal status of price leadership, given court opinions from antitrust cases: “[P]rice leadership is not apt to be found contrary to the antitrust laws unless the leader attempts to coerce other producers into following its lead, or unless there is evidence of an agreement among members of the industry to use the leadership device as the basis of a price-fixing scheme.” As the Federal Trade Commission notes on its website: “A uniform, simultaneous price change could be the result of price fixing, but it could also be the result of independent business responses to the same market conditions.”

Scherer and Ross describe price leadership in a number of oligopolistic industries during the twentieth century, including cigarettes, steel, automobiles, breakfast cereals, turbogenerators, and gasoline.

Recently, Nathan Miller of Georgetown University, Gloria Sheu of the Federal Reserve, and Matthew Weinberg of Ohio State University published an article in the American Economic Review analyzing price leadership in the beer industry. They focus on the period from 2001 to 2011, although they believe that conditions in the beer industry are similar today. From 2001 to 2007, three large U.S.-based firms—Anheuser-Busch, SABMiller, and Molson Coors—accounted for about two-thirds of beer sales in the United States. Two importers—Heineken and Grupo Modelo—accounted for about 14 percent of sales.  In 2008, SABMiller and Molson Coors combined to form MillerCoors and InBev—which had a small market share—bought Anheuser Busch. In 2011, MillerCoors and InBev together accounted for 63 percent of beer sales.

ABI has acted as the price leader, announcing prices in the late summer that MillerCoors typically matches. ABI’s Bud Light had the largest market share among beers in the United States in 2011, well ahead of Coors Light, which had the second largest share. They find that industry profits were 17 percent above the competitive level in 2007—just before the Miller-Coors merger—and 22 percent above the competitive level in 2010—after the merger. The U.S. Department of Justice (DOJ) had decided not to contest the Miller-Coors merger because “cost savings in distribution likely would offset any loss of competition.” As it turned out, the cost savings occurred but their value was smaller than the losses in consumer surplus resulting from reduced competition.

The authors estimate that, compared with the competitive outcome, the reduction in consumer surplus in the beer market due to price leadership equaled 154 of the increase in producer surplus before the Miller-Coors merger and 170 percent after it. Figure 15.5 from Chapter 15 of Microeconomics (reproduced below) illustrates why the loss of consumer surplus is larger than the increase in producer surplus: The increase in price and decline in quantity compared with the competitive level results in a deadweight loss that reduces the total economic surplus in the market. (Note that the figure is comparing the situation when a market is monopoly with the situation when the market is perfectly competitive. For simplicity, we are assuming that price leadership in an oligopolistic industry, such as beer, results in the monopoly outcome. But note that whenever collusive behavior, like price leadership, occurs in an industry, we would expect an increase in deadweight loss that will make the gains to firms larger than the losses to consumers.)

Sources: Federal Trade Commission, “Price Fixing,” ftc.gov; U.S. Department of Justice, Antitrust Division, “Price Fixing, Bid Rigging, and Market Allocation Schemes: What They Are and What to Look for,” justice.gov; Nathan H. Miller, Gloria Sheu, and Matthew C. Weinberg, “Oligopolistic Price Leadership and Mergers: The United States Beer Industry,” American Economic Review, Vol. 111, No. 10, pp. 3123-3159; and F.M Scherer and David Ross, Industrial Market Structure and Economic Performance, Third edition, Boston: Houghton Mifflin, 1990.

Microsoft Buys Activision

Photo from the Wall Street Journal

When a firm decides to expand, it has two main choices: 1) Grow internally, or 2) grow by purchasing (or merging with) another. When Microsoft decided to increase its ability to produce and distribute video games, it chose to grow by acquiring Activision Blizzard, maker of Call of Duty and World of Warcraft among other games. Microsoft’s main objective in buying Activision was to increase the number of games it would have available on its Game Pass cloud-based game streaming service.

Traditionally, people have played video games like Call of Duty on video game consoles like Microsoft’s Xbox or Sony’s PlayStation. This arrangement is similar to how at one time many people watched movies on DVD or Blu-ray players. Today, more people stream movies by subscribing to streaming services like Netflix, Amazon Prime, or Disney+. With these cloud-based movie streaming services, people watch movies on their computers, tablets, or smartphones without having to download them.

With Game Pass, Microsoft is trying to bring the streaming model to video games. If successful, gameplayers would no longer need a video game console, being able to instead play the game on any internet-connected device, including a smartphone.  So far, cloud-based gaming has been growing fairly slowly because games contain much more data than do movies, which makes it more difficult to adapt them to streaming. Microsoft hopes that after successfully converting Activision’s popular games to streaming, it will give a boost to its Game Pass service. 

Microsoft also indicated that it acquired Activision to help it expand its ability to offer products in the “metaverse,” which is a so far not fully developed version of the internet in which people can interact using augmented reality or virtual reality. Most industry observers believe that given that at this point few metaverse services and products are available, the contribution of Activision to the expansion of Game Pass was likely Microsoft’s main motivation in acquiring the company.

Microsoft’s acquisition of Activision would appear to benefit consumers because it would allow them to stream Activision’s games. Prior to being acquired, Activision apparently had no plans to launch its own game streaming service. In that sense, the acquisition brought together a firm with a popular product (video games) and a firm that had a better way of distributing the product (Game Pass). Still, some industry observers wondered whether the acquisition might lead to an antitrust investigation by either the Antitrust Division of the U.S. Department of Justice or the Federal Trade Commission. (We discuss antitrust policy in Economics and Microeconomics, Chapter 15, Section 15.6.)

Antitrust investigations are most common when two firms in the same industry merge because that type of horizontal merger raises the possibility that the new, larger firm may have greater market power, which would increase its ability to raise prices.  Microsoft’s acquisition of Activision is an example of a vertical merger, or a merger between firms at different stages of the production of a good or service. Activision’s game content would be combined with Microsoft’s Game Pass system of distributing games.

The federal government doesn’t typically challenge vertical mergers because they rarely impose a burden on consumers, as horizontal mergers may. But officials in the Biden Administration have promised stricter scrutiny of mergers involving large tech firms, like Microsoft. In response to the possibility of antitrust action against its acquisition of Activision, Microsoft argued that it wouldn’t “be withdrawing games from existing platforms, and our strategy is player-centric—gamers should be able to play the games they want where they want. We believe this acquisition will only increase competition, but it is ultimately up to regulators to decide.” 

Sources:  Kellen Browning, “It’s Not Complicated. Microsoft Wants Activision for Its Games,” New York Times, January 19, 2022; Cara Lombardo, Kirsten Grind, and Aaron Tilley, “Microsoft to Buy Activision Blizzard in All-Cash Deal Valued at $75 Billion,” Wall Street Journal, January 18, 2022; Sarah E. Needleman, Wall Street Journal, January 20, 2022; and Stefania Palma, James Fontanella-Khan, Javier Espinoza, and Richard Waters, “’Too Big to Be Ignored’: Microsoft-Activision Deal Tests Regulators,” ft.com, January 22, 2022.

The Biden Administration’s New Approach to Antitrust Policy

Chair Lina Khan of the Federal Trade Commission

For the past few decades, across different presidential administrations, antitrust policy has typically involved the following key points, which we discuss in Chapter 15, Section 15.6:

  1. Responsibility for antitrust policy is divided between the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ). 
  2. For horizontal mergers, the DOJ and the FTC have published numerical guidelines that provide a benchmark for their decisions on whether to oppose a merger and give firms a good idea of whether a proposed merger will be allowed.
  3. Antitrust enforcement is focused on consumer well-being, so a merger that increases monopoly power while at the same time improving economic efficiency will be allowed if the net effect of the merger is to increase consumer surplus.
  4. If firms disagree with a merger decision from the FTC or the DOJ, those agencies typically file a law suit in a federal court to enforce their decision. Therefore, antitrust policy ultimately depends on how the federal courts interpret the antitrust laws. (We list the most important antitrust laws in Chapter 15, Table 15.2.)

During the 2020 presidential campaign President Joe Biden did not announce a detailed policy towards antitrust and the issue played only a small role in the campaign. Late in the campaign, a Biden spokesman did state that, “growing economic concentration and monopoly power in our nation today threatens our American values of competition, choice, and shared prosperity.” Once in office, Biden’s appointments to key antitrust positions favored a more aggressive approach to antitrust policy.

The views of most Biden appointees were similar to those of Louis Brandeis who served on the U.S. Supreme Court from 1916 to 1939. Brandeis was not familiar with economics and his views on antitrust as stated in his articles and court decisions can be contradictory.

But Robert Bork of the University of Chicago in his book the Antitrust Paradox provided an influential interpretation of Brandeis’s views. According to Bork, in the early twentieth century, “the dominant goal [of antitrust policy] was the protection of consumer welfare, though Justice Louis Brandeis … was the first to give operative weight to the conflicting goal of small-business welfare.” Bork argued that an implication of Brandeis’s views was that antitrust enforcement might end up “protecting the inefficient [firms] from competition.”  Similarly, Daniel Crane of the University of Michigan refers to the “’Brandeisian’ tradition, associated with US Supreme Court Justice Louis Brandeis, [which] is often described as … supporting atomistic competition because of its beneficial effects on personal liberty and autonomy.”

President Biden has appointed several people who support the Brandeis approach to antitrust including Lina Khan of Columbia University as chair of the FTC; Tim Wu of Columbia University as an adviser to the president; and Bharat Ramamurti, a former aide to Massachusetts Senator Elizabeth Warren, as deputy director of the National Economic Council. John Cassidy, an economics writer for the New Yorker, summarized their position:

“Proponents of the New Brandeis-ism contend that these agencies should act proactively—carrying out broad investigations, publishing reports, and establishing rules of conduct for companies with a great deal of market power, including tech platforms and broadband providers.”

In July 2021, President Biden issued an executive order creating a White House Competition Council. According to a statement from the White House, the purpose of the council is to: “to coordinate the federal government’s response to the rising power of large corporations in the economy.” Also in July 2021, the FTC under Chair Khan’s leadership voted to move away from the consumer welfare standard for judging anticompetitive business strategies, including merging or acquiring other firms and certain pricing decisions, such as cutting prices to below those charged by smaller rivals. The result of the FTC’s new approach is that the agency will  take action against business strategies that are not directly in violation of the federal antitrust laws. The FTC is particularly concerned by strategies used over the years by large technology firms such as Facebook, Google, Amazon, and Apple. 

The Biden administration’s redirection of antitrust policy has run into criticism. An article in the Wall Street Journalquoted the president of the Consumer Technology Association as stating that: “The consumer-welfare standard grounds competition policy in objective facts and evidence. By protecting consumers rather than competitors, we ensure antitrust decisions are not subjective or political.” The “consumer-welfare standard” is the standard that had been used under previous presidential administrations as we outlined in points 2. and 3. above. A possible barrier to the Biden administration’s change in policy is that ultimately it is up to the federal courts to decide the legality of a business strategy. In recent decades, the federal courts have consistently required that for a strategy to be declared illegal it must be a violation of the antitrust laws.

Until the FTC or the DOJ use the new standard to bring actions against firms and until the courts either uphold or dismiss those actions, it won’t be possible to know whether the Biden administration’s antitrust policy will end up being much different from the policies of previous administrations. It could be a number of years before actions brought under the new standard make their way through the court system. 

Sources: Brent Kendall, “New Policy Gives FTC Greater Control Over How Companies Do M&A,” wsj.com, October 29, 2021; Executive Office of the President, “Fact Sheet: Executive Order on Promoting Competition in the American Economy,” whitehouse.gov, July 9, 2021; John D. McKinnon, “FTC Vote to Broaden Agency’s Mandate Seen as Targeting Tech Industry,” wsj.com, July 1, 2021; John Cassidy, “The Biden Antitrust Revolution,” newyorker.com, July 12, 2021;  David McCabe and Jim Tankersley, “Biden Urges More Scrutiny of Big Businesses, Such as Tech Giants,” nytimes.com, September 16, 2021; Daniel A. Crane, “Rationales for Antitrust: Economics and Other Bases,” in Roger D. Blair and D. Daniel Sokol, The Oxford Handbook of International Antitrust Economics, Vol. 1, New York: Oxford University Press, 2015; Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself, New York: Basic Books, 1978; and Kenneth G. Elzinga and Micah Webber, “Louis Brandeis and Contemporary Antitrust Enforcement,” Touro Law Review, 2015, Vol. 33, No. 1 , Article 15.