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"IF WE will not endure a king as a political power, we should not endure a king
over the production, transportation, and sale of any of the necessaries of
life." So said Senator John Sherman, who proposed the first American law
against monopolies in 1890. Merging firms, however, argue that they will rule
benevolently and lower prices. They claim that savings made from combining
their efforts will be passed on to customers. The problem for regulators is
that it is difficult to tell how much firms are fibbing. Prices can change for
many reasons higher costs, tariff changes, consumers tastes and a price rise
after a merger might not directly be the result of price fixing by a newly
crowned monopoly.
A new paper published earlier this summer in the RAND Journal of Economics
tests whether regulators made the right call in the American beer industry. The
paper looks at the 2008 merger of Miller and Coors, the second and third
largest brewers at the time in the United States. Miller and Coors argued that
a merger would combine their distribution networks, thus reducing
transportation costs. Regulators worried that the merger would create one
superbrand in some markets, MillerCoors, which would then enjoy a partial
monopoly by virtue of its size. Monopolistic firms can raise their prices
without worrying their customers will scurry off to other brands, because there
are no good substitutes and few alternatives.
Two features of the American beer industry meant that the researchers had
unusually helpful data to work with. First, due to intricate regulations, beer
cannot be transported for sale by distributors between states, but must be sold
direct from the brewery to a licensed distributor in each state. This means
that brewers and distributors can set different prices for their products in
different states, and so beer markets are bounded along state lines. The
researchers could treat each of the 48 states as a separate experiment . If
one big merger lowers prices, this could have been a fluke, but 48 separate
results give more confidence in the conclusion. Secondly, some states were
going to benefit from bigger transport savings, and others would be prone to
more brand dominance. This natural variation between states meant that one
could test the whole gamut of factors that could raise or lower prices.
The researchers found that overall, prices slightly increased. As soon as the
merger was approved, prices of Miller and Coors beer started rising,
particularly in regions where brand concentration increased. But two years
after the merger, prices fell, particularly in regions where transport costs
were reduced. The lag is due to the time it took for the brewers to combine
their distribution networks. Overall, the average price of MillerCoors beer
increased by 0.2%.
This paper was part of a decade-long research project by Orley Ashenfelter of
Princeton University, Dan Hosken of the Federal Trade Commission (FTC), and
Matt Weinberg of Drexel University. They looked at close calls , or mergers
that were heavily scrutinised by the Department of Justice and the FTC for
being potentially anti-competitive, but nevertheless were allowed. They find
that the Department of Justice and FTC tend to be rather too lenient.
Close-call mergers that increase prices are mainly the norm. But that leniency
may be no more: on July 1st the Department of Justice launched an investigation
into collusion between the major four airlines, including American Airlines,
which had formed from a merger approved in 2013. The same week, Sysco and US
Foods, two food distributors, abandoned their merger plans after opposition
from the FTC and federal judges. But for now, there are still hidden corporate
kingdoms in America.