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2015-08-04 13:26:26
"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.