06 March 2013

The Stupidity of Technocratic Economics

This time regarding the beer market:

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.

What’s intriguing about the government’s concern about Anheuser-Busch and the market it’s part of is that at no point does anyone in the justice department ask whether consumers are going to be worse off with Anheuser-Busch growing larger.  The number of beer producers has increased by over 2600%, but somehow consumers are worse off because one of the 2336 beer producers may be really large?  What sort of stupidity is this? Consumers have more beer choices than ever, and more alternatives to beer than ever, yet one company is considered to be a near-monopoly because its market share is becoming really large.  And no one at the justice department thinks to ask whether consumers (you know, the ones who are supposed to be protected by antitrust laws) are okay with this arrangement.

To be honest, everything about this analysis is stupid.  The definition of the market is limited and shallow.  Anheuser-Busch isn’t just competing with other beer companies for dollars; they’re competing with every company on earth for dollars.  People aren’t forced to buy or drink beer, let alone Anheuser-Busch products.  Segmenting the market one particular way and then ignoring alternative goods and markets is simply shallow.  And, since the point of anti-trust laws is protecting consumers, it seems stupid to forego asking whether consumers really like Anheuser-Busch products.  If they do, why limit how much Anheuser-Busch can grow?

Also, why are pricing wars considered so bad?  Lower prices are good for consumers, right?  And even if one company manages to bankrupt all of its competitors, that doesn’t mean that it gets to charge whatever price it wants; if it charges prices that are too high, new competitors may enter the market and undercut the monopoly.

More to the point, the idea of market monopolies being abusive is a silly concept.  It is predicated on stupid tautologies and shallow analysis.  Hilariously, monopoly theory manages to generally ignore the inconvenient fact that it is the state that enables monopolies and their attendant abuses, and not the market.  To put it simply, it’s time to move beyond this puerile, vapid “analysis” to something better and more reasonable.  Maybe then we can finally get around to actually helping consumers.