Intermediate Micro Theory
From what I can infer from Planet Money Podcast presentation, the main topic revolves of collusion, gigantic mergers, monopolies, and economic regulations. Apparently, two leading companies have allegedly formulated a plan that appears to have an ill will of laundering money from ordinary Americans. A point to note is that this is no ordinary money but beer money. In this regard, Anheuser-Busch InBev is the largest global beer company and intends to execute an acquisition of Grupo Modelo, a company that specializes in making Corona. Nevertheless, a government agency has moved to save the finances of millions of Americans from this plan.
According to the Planet Money Podcast, Corona Company already owns a variety of beer brands circulating in the global markets. This company is working to exercise business authority over key beer companies. In other words, Anheuser-Busch InBev is a growing company that is attempting to monopolize the beer manufacturing industry in the world. If a company such as Anheuser-Busch monopolizes the beer industry, it will be harvesting large sums of money indirectly but legally from beer consumers (Johnsen, 51). This can be achieved through a strategy referred to as price discrimination. This strategy would allow Corona to determine and set high prices that would be slightly higher than when healthy competition was in existence.
Recently, Anheuser-Busch InBev announced that it was intending to buy out beer brewing company, Grupo Modelo. This assertion prompted counteractive measures from various agencies from the anti-trust division of the justice department or competition enforces. This department employs a taskforce with PhD economics qualifications. These individuals are experts in this field and work to ensure that the business environment is functioning with healthy competition in order to prevent manipulation of consumer money. This prevents companies from merging to avoid competition and large companies from closing out up coming companies that pose competition. Other than these agencies, governments also intervene in these matters in order to prevent such scenarios from happening.
However, to prevent such companies from forming mergers or monopolies, agencies and governments have to prove that these endeavors will hurt the consumer eventually. Otherwise, it would not be possible to prevent such business activities. This implies that companies intending to create monopolies or mergers with intentions. Beyond the agencies and governments are other entities that work in a similar but indirect manner that prevents price manipulation by other companies. These entities are, in fact, companies in the same competitive industry referred to as mavericks (Johnsen, 64). When leading companies work together and plot to raise commodity prices, mavericks stand their ground and maintain their retail price. This strategy works to keep commodity prices at the required levels.
Anti-trust and pro-active legislation in the United States is a collection of state and federal laws that are designed to regulate how business organizations conduct their operations. These laws have an objective of promoting fair competition to protect consumers from manipulation. Primarily, they work on two fronts. The first includes restricting the formation of cartels and prohibition of collusive operations that are considered to restrain trade. The second function involves restricting acquisitions and mergers by companies that intend to lower competition (Johnsen, 27). The history of anti-trust and pro-active laws dates back to 1890 with the Sherman Antitrust Act. This Act was established to combat the American economy “business trusts” in the 19th century, and remains the foundation of antitrust enforcement in America.
Even though the Sherman Act is interpreted to apply to all trade restraints, the Supreme Court in the United States maintained that it only applies in unreasonable trade restraints. Penalties for violating this Act are either criminal or civil nature. The Department of Justice in the U.S. is the only agency that has authority of prosecuting persons found to have violated this Act. In 1914, the Congress enacted an additional two trust laws. The first was the Federal Trade Commission Act that enforced antitrust laws in the United States. The second was the Clayton Antitrust Act established to strengthen and supplement the application of antitrust laws. Over the years, the Clayton Act has gone through a number of amendments. The first was in1936 by Robinson Pitman to stop certain forums from discriminating business activities. The second amendment came in 1976 by Hart Scott Rodin that required companies with the intention of merging to inform the federal government. This is to allow investigations on the merger’s competitive effects.
All global beer industries are known for their oligopolistic nature (Ogle, 3). In the early 2000s, the US beer market in particular was dominated by three principal players. These include Anheuser-Busch with a market share of forty-eight percent, Miller Brewing Company with an eleven percent market share, and Coors Brewing Company with eleven percent share of the beer market. The remaining percentage was dominated by microbreweries. Calculations for the concentration ratio of the market revealed that the three leading companies constitute over eighty percent and a HHI threshold of well over 1,800.
However, as of 2008, two significant transactions led to the creation of a new market structure. This structure was a duopoly with two leading companies. These are ABInBev (Anheuser-Busch’s parent company) and SABMiller (MillerCoors and Molsons’ parent company) (Minn, 78). This duopoly constitutes eighty percent of the total beer sales in the United States. Other two top companies also currently hold a position in the structure. These Heineken and Modelo (Corona) account for a combined ten percent of US beer sales. All the above four companies are owned multi-international corporations based in foreign countries. ABInBev is the leading company with an individual market share of fifty percent. The company is looking to expand its market share with through a full acquisition of Modelo Company.
Few large-scale beer companies have entered the market in recent years due to high costs of acquiring plants or costs of building. Small craft brewers are the only few entrants whose competition with leading brewers is through specialty products. The beer industry is exhibiting a trend towards consolidation. Contrary to this, however, the market segment of craft beer is fragmented highly and it consists of approximately 2,000 small brewers. The growth of this segment is phenomenal and constitutes about six percent market volume and ten percent market value (Minn, 107).
The definitive study above has applied data, history, and theory in its endeavor to analyze the United States brewing industry, market structure, and its oligopolistic nature. Conclusions have been drawn from reliable and informed sets of data, in addition to applying factual tools of game theory, industrial organization, and strategies of management. Ultimately, this study has managed. This study has succeeded in providing qualitative and quantitative perspectives of an industry that exhibits a “veritable laboratory market” characteristic. The brewing industry in the US illustrates various topics in economic policy, industrial organization, mixed pricing strategies, and business strategies.
From a business operations point of view, it makes sense for competing companies to execute mergers or acquisitions to nullify the setbacks of competition. Achieving this hands them a number of benefits the main being lowering costs of production and fixing product prices. Nevertheless, it is necessary to note that companies in this case benefit at the expense of consumers. Customers are often forced to part with more money upon purchasing a product that should cost much less when mergers and acquisitions are successful. To prevent this, various parties come into play especially in the US beer industry. These include the government, anti-trust and pro-active legislation, and mavericks. These are the three main parties that ensure that plots such as monopolies, ill-willed mergers and acquisitions do not go through.
In this regard, ABInBev Company has managed to establish dominance in the US beer market and is looking to enlarge its territory through the full acquisition of Grupo Modelo Company. This move prompted counteractive measures from various agencies from the anti-trust division of the justice department or competition enforces. Additionally, the United States legislation requires the carrying out of investigations to investigate the motive of acquisition and establish whether it intends to exploit American beer consumers. Apparently, ABInBev holds fifty percent market share of the US beer industry. In my opinion, I think that its attempt to raise this share is a strategy to monopolize the beer industry (Swinnen, 47) The Company already has massive competitive advantage over its rivals with half the market share. Hence, from the case, I think that the acquisition attempt will be rebuffed.
Cooke, Terence E. Mergers and Acquisitions. Oxford, OX, UK: B. Blackwell, 2006. Print.
Johnsen, Julia E. Beer Industry and the Anti-Trust Laws. New York: H.W. Wilson Co, 2004. Print.
Minn, Paul. Overview of the U.S. Beer Industry. Minnesota Trade & Economic Development, 2009. Print.
Ogle, Maureen. Ambitious Brew: The Story of American Beer. Orlando: Harcourt, 2006. Print.
Swinnen, Johan F. M. The Economics of Beer. Oxford: Oxford University Press, 2011. Print.