Are We in Danger of a Beer Monopoly

Illustration by Jasper Rietman

Every day, the Web site BeerPulse tries to list every single new beer available in the United States. And that’s harder than you might imagine. Recently, the site posted Cigar City’s Jamonera Belgian-style Porter, Odell Tree Shaker Imperial Peach IPA, as well as a rye lager, a cherry blossom lager and a barley wine. And the list goes on, and on. In 1978, there were 89 breweries in the United States; at the beginning of this year, there were 2,336, with an average of one new brewery per day. Most of them are tiny, but a handful, like Sam Adams and Sierra Nevada, have become large national brands. At the same time, sales of Budweiser in the United States have dropped for 25 consecutive years.

So I was surprised to learn that the Justice Department is worried that Anheuser-Busch InBev, the conglomerate that owns Bud, is on the cusp of becoming an abusive monopoly. In January, the department sued AB InBev to prevent it from buying the rest of Mexico’s Grupo Modelo, a company in which it already carries a 50 percent stake. The case is not built on any leaked documents about some secret plan to abuse market power and raise prices. Instead, it’s based on the work of Justice Department economists who, using game theory and complex forecasting models, are able to predict what an even bigger AB InBev will do. Their analysis suggests that the firm, regardless of who is running it, will inevitably break the law.

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.” When Bud and Coors raise their prices, Grupo Modelo’s Corona does not. (As an imported beer, Corona is also considered to have a higher value.) And so, according to the Justice Department, AB InBev wants to buy Grupo Modelo not because it thinks the company makes great beer, or because it covets Corona’s 7 percent U.S. market share, but because owning Corona would allow AB InBev to raise prices acoss all of its brands. And if the company could raise prices by, say, 3 percent, it would earn around $1 billion more in profit every year. Imagine the possibilities. The Justice Department already has.

Representatives from AB InBev, however, have stated that the potential Corona acquisition is less about dominating the dwindling (albeit still $90 billion per year) U.S. beer market and more about a larger, global strategy. In that regard, AB InBev has been on quite a roll. The Brazilian firm Companhia de Bebidas das Américas, or AmBev, was born in 1999 around the concept of using innovative technology and managerial efficiency to disrupt the competition and channel the profits into buying them out. The company swallowed up several Latin American firms; in 2004, it merged with the Belgian giant Interbrew; in 2008, the new conglomerate, InBev, took over Anheuser-Busch. Along the way, it also picked up China’s third-largest brewer and the Canadian beer company Labatt.

Adam Davidson is co-founder of NPR’s “Planet Money,” a podcast and blog.

A version of this article appeared in print on March 3, 2013, on page MM16 of the Sunday Magazine with the headline: BUZZKILLED.