How Did the Miller-Coors Merger Affect the U.S. Beer Industry?
Despite reducing the number of macro brewers from three to two, the efficiency gains created by the merger offset the incentive to increase prices in the average regional market in the long run.
Mergers can have many effects, and they may vary across industries and markets. In Efficiencies Brewed: Pricing and Consolidation in the U.S. Beer Industry (NBER Working Paper No. 19353), Orley Ashenfelter, Daniel Hosken and Matthew Weinberg analyze the 2008 merger between Miller and Coors, the second and third largest American breweries. They focus on whether the merger resulted in efficiencies, which could lead to lower prices, and whether the increased market power of the combined firm affected prices. They study the merger's impact in 48 markets and conclude that efficiencies were indeed achieved, but that prices also went up.
Prior to the merger, Coors was brewed in two locations, while Miller was brewed in six locations more widely distributed across the United States. The merger was expected to allow the combined firm to reduce shipping costs primarily by moving the production of Coors products into Miller plants. The average distance between a Coors brewery and the markets considered in this study decreased by 364 miles after the merger. Pre-merger analysis noted that this cost saving could give the combined firm an incentive to reduce the prices of its products, potentially offsetting any incentive to increase prices as a result of the reduction in the number of independent brewers.
The researchers exploit two key features of the U.S. beer industry in analyzing the effects of the merger. First, regulations on the distribution of beer effectively make different metropolitan areas separate markets. Second, there was substantial variation in how the merger was expected to reduce shipping costs and increase concentration across the 48 regional markets in the study. Thus, even though both Coors and Miller create products that are sold nationally, the local market variation makes it possible to study the distinct effects of the merger.
The authors compare the change in the average price of beer in a market with the predicted increase in concentration resulting from the merger and the reduction in distance between that market and the nearest Coors brewery. They find that larger predicted increases in concentration were associated with larger price increases, and that larger reductions in shipping distances were associated with smaller price increases or price reductions. Further, they find that the market power effect developed more quickly than efficiency saving: prices began increasing gradually as soon as the merger was announced in markets where the merger increased market concentration. However, the researchers' estimates indicate that cost reductions did not start to impact pricing until a year after the merger was approved by the U.S. Justice Department. These efficiency savings were not fully incorporated into prices until about two years after the merger's approval.
The authors find that despite reducing the number of macro brewers from three to two, the efficiency gains created by the merger offset the incentive to increase prices in the average regional market in the long run. If the distribution costs had not been affected by the merger, the average market would have experienced a price increase of just under 2 percent because of the merger. If market power had not been affected, the efficiencies created by the merger would have led to a long-run price decline of about 1.8 percent in the average market. The authors caution against over-generalizing from their findings, but maintain that the Miller-Coors merger can be viewed as generating 48 small experiments that differentially varied expected increases in both concentration and reductions in costs.