Brewery Pricing Structure

8/10/2019 Brewery Pricing Structure

1/14

Vertical agreements: an empirical price analysis of beer

Van Passel Steven1& Wauters Erwin2

1Hasselt University, Department of Business Economics, Agoralaan Building D, B-359 Diepen!ee", Belgium#

$%&', (ocial (ciences Unit, Burg) &an *ans!erg+elaan 115, B-9# erel!e"e, Belgium

Abstract

In several countries worldwide, the market structure of the brewery industry is

one of a limited and decreasing amount of producers. Such highly concentrated

production is most often accompanied by signicant market power. Furthermore,

a common practice of market behaviour is vertical coordination where rms maydecide to combine technologically dierent production processes, distribution

processes, marketing processes or any other economic process. In fact, the

extent of vertical coordination may range along a continuum from a spot market,

contracting, strategic alliance, formal cooperation to full vertical integration.

common strategy of breweries is to conclude exclusivity agreements with bars.

!his paper reports on a study investigating the impact of vertical agreements

between beer producers and beer selling bars on the beer price. "uantitative

analysis of vertical agreements was performed using survey data of #elgian bars.

$xecuting a principal component analysis we found four relevant components%

component & 'bar location, bar density(, component ) 'bar ownership, exclusivityagreement(, component * 'bar type( and component + 'beer turnover(. !o

determine the impact of these components on the beer price, a regression

analysis was performed. !he results show that the beer price is determined by

bar location and bar type. e found no impact of existing vertical agreements

between brewers and bars on the beer price. !his indicates that other aspects

such as bar location and bar type are more important to determine the beer price

than the existence of vertical agreements.

-eywords% vertical integration, vertical agreements, price analysis, breweryindustry

&


2/14

1. Introduction

!he brewing industry has become a global business consisting of severalmultinational companies. !here is an ongoing process of concentrationwith a decrease in the number of breweries and an increase of productioncapacity. !his hori/ontal integration process, whereby breweries take overother breweries, started already in the &0th century and is still ongoingtoday. 1urrently the global market is dominated by a limited amount ofmultinational breweries2 nevertheless there still exists a large amount oflocal and regional breweries. !he ma3ority of these smaller companiesfocus on the production of dierent varieties of ale 'or specialty beers(.

!he global beer producers rather focus on the production of lager where asa conse"uence the market concentration is higher. !his study has its focuson the lager beer market.

4ighly concentrated production may result in the presence of signicantmarket power. !heoretically, the beer market can be described as anoligopolistic market, where a small group of rms operate in a market withsubstantial barriers to entry. !here exist several possible reason for amarket structure to be characteri/ed by a high concentration with very fewlarge rms dominating the industry. First, the existence of economies ofscale create incentives for rms to grow. !he larger the scale of

production, the lower the average variable costs of beer production.Second, rms often grow by buying out rivals, by merging with them, withthe aim of reducing competitive behavior and gaining larger protmargins. s in many global industries, the answer is probably that partlythe increase in si/e comes from the e5ciencies of large scale and scope,and partly from the desire of rms to create market power by growinglarge. n important and highly relevant issue is the "uestion whetheroligopolistic companies use their competitive energies to improve theirproducts and production processes, rather than merely to erect entrybarriers.

6ertical agreements 'or exclusivity agreements( between brewers and barscan serve as a strategy to hamper the entrance of new breweries. widelyused argument is that breweries would use their market position to reali/e7excessive8 prots by increasing the beer price through bar ownership andvertical agreements. !o investigate the impact of vertical agreements,profound empirical research is necessary. For instance, the existence ofsuch vertical exclusivity contracts are often blamed for articially raisingbeer selling prices. !his paper contributes to the empirical literature onthis issue investigating the impact ofvertical agreements between beer producers and beer selling bars on the

beer price.

)


3/14

2. Beer market structure and vertical integration

naly/ing market structure and market behavior is essential to investigatethe impact of companies on 'consumer and producer( welfare. 9arketstructure refers to the type of market in which rms operate. #reweries donot operate in perfectly competitive markets, because the number ofcompeting rms is too small 'especially if you focus on the lager market(. simplistic measure to estimate potential market power is theconcentration ratio. For example the 1* ': the turnover of the largestthree enterprises as a ; of the turnover of the sector( of the #elgian beermarket was n the other hand, Schumpeter '&0+)( argues that entry barriersare not a serious problem in the very long run, because new companiescan for example circumvent entry barriers by developing similar productswhere existing companies have no entry protection. ?evertheless, on the

short and even medium run, entry barriers deserve our attention.

!heoretically, there are several ways to create entry barriers. ?aturalbarriers can arise as a result of economies of scale. nother possibility isthe creation of policycreated barriers by dierent government levels 'e.g.patent laws, licenses(. 1ompanies can create a large amount of dierentbrands, to decrease the market share available to a new rm entering witha single new product. Furthermore, companies can also create entrybarriers by imposing signicant xed costs on entrants '@AB, advertisingcosts,C(. lso vertical integration can be used as a strategy to hamper theentrance of new companies.

*


4/14

ithin the brewery industry, a practice of market behavior is verticalcoordination where rms may decide to combine technologically dierentproduction processes, distribution processes, marketing processes or anyother economic process. In fact, the extent of vertical coordination mayrange along a continuum from a spot market, contracting, strategic

alliance, formal cooperation to full vertical integration. common strategyof breweries is to conclude socalled vertical agreements with bars orpubs. !he tied pubs dier on several dimensions, including the ownershipof the pub, the authority to set the retail price, and the existence of xedrental fees 'Slade, &00=(. >n the #elgian beer market, there exist twoimportant forms of contractual forms% 'i( loan agreements and 'ii( lease orsublease agreements. #oth vertical agreements contain an exclusivepurchasing contract or a noncompete obligation, forcing the bars to serveexclusively the company8s beer. ?ote that the contractual terms can dier'also depending on the total market share of the brewery(.

ithin the context of vertical integration, it is important to understand whois competing with whom and in what sense. general overview of the#elgian beer market chain is depicted in gure &. !he ma3ority of the beerproduction is distributed to retail and catering 'hotels, restaurants andbars(. #ars can purchase directly from their brewers or from beermerchants. >nly a very limited amount of beer is directly distributed frombrewer to consumer. !he share of beer consumption at home 'retail( isincreasing and already +


5/14

Figure &% the chain from barley farmer to beer consumer.

>ur research only focuses on the market link between catering 'and more

specic bars or pubs( and the brewery industry 'the grey arrow in gure&(.

#y concluding vertical agreements 'or exclusivity contracts(, breweries tryto circumvent possible freerider problems, holdup problems and creditmarket imperfections. 9oreover, such vertical agreements have the aim toincrease uniformity and "uality standardi/ation and to benet fromeconomies of scale. >n the other hand, vertical agreements can result inexclusion, creation of barriers to entry for new players on the pub market,decreasing competition, , etcC n often heard disadvantage is that suchexclusivity contracts positively aect beer selling price in bars.

lthough, the choice of vertical market structure is normally endogenous'Slade, &00=(, we empirically investigate the relationship between brewersand bars. In this way, this research contributes to the discussion about thepossible impact of vertical agreements on consumer welfare. 9orespecic, the research ob3ective is to empirically test the impact of theexistence of vertical agreements on the beer price.

3. Methodology

D


6/14

In a rst research stage, several key actors such as bar managers,association representatives, producers were interviewed to collect thenecessary background information.

3.1 Data

!he research population are the #elgian bars. In )


7/14

constructed with photographs and a brief description of the dierent bartypes and bar locations.

!able )% >verview of research variablesIndicator "ariable #ncoding

#ar location 1ity centre < or &1ity < or &1ity border < or &@ural centre < or &1ountry < or &

#ar density #ar densityJ&K &2)2* or +#ar type @egular bar < or &

Lrban bar < or &Mouth bar < or &1lub bar < or &

Nrovince ntwerp < or &Flemish #rabant 'H#russels(

< or &

$ast Flanders < or &est Flanders < or &imburg < or &

#ar turnover mount hectolitre 'hl( lager & : less then )


8/14

with yias the dependent variable, x ikas - independent variables, Q


9/14

Figure )% 4istogram of the lager price

%.2 #m!irical analysis

!able * and + show the results of the dierent regression analysis. !he rstregression shows that bar type, bar location, province and the share ofbeer in the total turnover are important determinants of the beer price inpubs. @egression & shows clearly that the price in urban, youth and clubbars are signicant higher then in regular bars. Further, we see that theprice in city bars is higher than the price in city borders, rural centers andthe country side, and lower than in city center bars. e also see signicantprice dierences between provinces. Furthermore, regression & in table *shows that the share of beer in the total turnover has a signicant

negative impact on the beer price, indicating higher beer prices in barswith a lower share of beer sales. In certain bars, customers can eat snacksand simple meals together with a higher priced beer. lso, bars thatprimarily serve other beverages such as cocktails and wine, but still servebeer, tend to set higher prices. Finally, we see that there is no signicantimpact of the exclusivity agreements on the beer price, and a smallpositive signicant impact of ownership, indicating a higher beer price inindependent bars.

!able *% regression analysis 'part I("ariables &egression 1 &egression 2 &egression 3

0


10/14

'oef. t(value 'oef. t(value

'oef. t(value

#ar type@egular bar . . . . . .Mouth bar


11/14

bar types, in bars with a dierent location, and in bars with a dierent share of

beer sales in their total turnover.

!able +% regression analysis 'part II(

"ariables &egression % &egression ) &egression *'oef. t(value 'oef. t(

value'oef. t(

value#ar type

@egular bar . . . . . .Mouth bar


12/14

!o broaden the empirical analysis, a principal component analysis can beexecuted to reduce the amount of variables and to structure the data. Inthis way, we can construct dierent independent components and usethese components in a second step regression analysis. ?ote that we rstredened certain variables to reduce the amount of dummy variables. !hevariable bar location was created with a range of &D, representing the vedierent locations, the variable bar type was created with a range &+,representing the four dierent bar types. !he variable province wascreated with a range &D, representing the ve dierent provinces. In thisway, the variables can be used to measure potential signicant impact,but the variables can not be used to explain the direction of the

correlations. s shown in table D, the rst principal component consists ofthe variables bar location and bar density, the second principal componentconsists of the variables owner and exclusivity agreement, the thirdprincipal component consists of the variable bar type and the fourthprincipal component consists of the variable amount 4 lager, indicationthe beer turnover.

!able D% !he dierent principal components"ariables 'om!onent

1 2 3 %>wner


13/14

1omponent * 'bar type(


14/14

Schumpeter, &0+). 1apitalism, Socialism and Bemocracy

Slade, 9.$., &00=. #eer and the tie% did divestitute of brewerowned public

houses lead to higher beer pricesX !he $conomic Vournal &

Brewery Pricing Structure

Documents

Transcript of Brewery Pricing Structure