Keeping Beer Prices Low

Last week, Planet Money ran a story about how beer monopolies in the U.S. affect what we pay for beer. Adam Davidson followed up on that story today in print for the Times Magazine:

For decades, they argue, Anheuser-Busch has been employing what game theorists call a “trigger strategy,” something like the beer equivalent of the Mutually Assured Destruction Doctrine. Anheuser-Busch signals to its competitors that if they lower their prices, it will start a vicious retail war. In 1988, Miller and Coors lowered prices on their flagship beers, which led Anheuser-Busch to slash the price of Bud and its other brands in key markets. At the time, August Busch III told Fortune, “We don’t want to start a blood bath, but whatever the competition wants to do, we’ll do.” Miller and Coors promptly abandoned their price cutting.

The trigger strategy, conducted in public, is entirely legal. In fact, it’s how airlines, mobile- phone companies and countless other industries keep their prices inflated. Since that dust-up in the late ’80s, the huge American beer makers have moved in tandem to keep prices well above what classical economics would predict. (According to the logic of supply and demand, competing beer makers should pursue market share by lowering prices to just above the cost of production, or a few cents per bottle.) Budweiser’s trigger strategy has been thwarted, though, by what game theorists call a “rogue player.”

That rogue player — the company that Planet Money deemed a “maverick” — is Mexico’s Grupo Modelo, which owns the popular Corona brand. When Budweiser tries to raise its prices, Corona does not — which encourages the other beer companies to keep their prices just as low. Anheuser-Busch InBev wants to buy Grupo Modelo so that it can raise prices all all its beers without worrying that beer drinkers will flock to the cheaper beer, and because of this, the Justice Department has stepped in to stop the merger (the Justice Department has also blocked the mergers of AT&T and T-Mobile, but is okay with American Airlines and US Airways merging to compete with Delta). Our beer prices remains safe for now.

Photo: Paul Lowry

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