The theoretical literature on vertical restraints establishes a clear linkage between collusive behavior and price restraints. In a vertical structure, upstream firms with market power can influence retail price, which can act as an instrument of collusion with other firms. As the competing manufacturers cannot observe the wholesale price, the retail price serves as the tool through which collusion is maintained. Any deviation from the retail price can easily be monitored by upstream firms for the punishment in the form of price wars. However, there are limited empirical evidences available to substantiate the existence of a link between vertical price restraints and collusion (at the upstream level), especially in industries where upstream market structure is dominated by few firms. The paucity of empirical analysis in this area is mainly attributed to non-availability of data.
Owing to mergers among major beer brewers in recent years, there has been an increase in concentration among upstream firms in the U.S. beer industry. As such, the vertical three—tier (brewers, distributors, and retailers) distribution system of the industry is becoming increasingly imbalanced in a way that potentially allows upstream brewers greater power in excreting control over the distribution system. If brewers acquire sufficient power and control over the distribution system, then these upstream firms can influence retail prices, sales, and the conduct of distributors/retailers in the industry. In other words, greater concentration upstream which yields greater upstream market power raises questions about price and non-price vertical (exclusive dealings) restraints imposed by brewers on retailers through distributors.
In a recent paper, Asker (2004) finds that exclusive distributors in the beer industry provide a significant cost advantage to their breweries. Counterfactual experiments suggest that a cost advantage has a larger impact on the welfare levels and the distribution of industry profits. Few large market players with huge market shares facilitate tacit collusion in the industry. A study by Miller and Weinberg (2015) finds empirical evidence of tacit collusion between Anheuser-Busch Inbev (ABI) and MillerCoors and establishes that the increase in prices is mainly attributed to coordinated effects among the leading brewers. However, the study analyzes the strategic behavior of brewers without explicitly modeling and testing price related vertical restraints in the model.
This study intends to utilize the IRI Marketing dataset (500 MB) and the Nielson dataset (1.4 TB) in estimating a structural econometric model of the U.S. beer industry. The model used explicitly captures the vertical structure of the beer industry using various forms of vertical restrains using above datasets. The study will contrast various structural supply-side models of vertical restrains, and analyze implications for collusive behavior and welfare. The group is using MSI to access MATLAB and STATA codes.