We find two markets in the beer industry: Alcoholic beer market and Nonalcoholic beer market.
The demand substitutability heavily affects the market boundary in the industry. People who cannot consume alcohol can never try alcoholic beer. On the other hand, people who can drink alcoholic beer generally do not like nonalcoholic beer because they want to enjoy drinking “alcohol”. It means that the demand substitutability between alcoholic beer and nonalcoholic beer is low.
In the alcoholic beer market, the demand substitutability is high. There are difference of the taste between the products (lagers, ales and etc.), but we believe people can switch the product easily. There is price difference, but still the range is $3-$7 and people can try other products easily. I can imagine if lagers decreased the price by $2, people having ales would try lagers. People can get almost all types of beer in USA, so there is no geographical boundary.
In terms of the supply substitutability, it does not affect the market boundary. All beer companies can produce any types of beer. If a beer company earned a lot of profit in the nonalcoholic beer market, others would jump in the market. There is no geographical boundary, neither.
In summary, the demand substitutability and the supply substitutability are high, except for the demand substitutability between non-alcohol and alcohol.
Large Firms. Anheuser-Busch and SAB-Miller/Coors use advertising as their main tool in fighting for market share. It has been argued that they advertise too much. (See “Beer: Price and Advertising Elasticities of Demand” in the reading package.) Do high levels of advertising make sense, or should they be scaled back? Should SAB-Miller/Coors rely more on pricing to compete with A-B? Why or why not?
Spending a lot of expenses make sense in the beer industry.
First, the demand substitutability is very high. Beer is relatively cheap though there is the $2-3 price difference. Beer has different tastes, but still it tastes beer. People can try another type of beer easily, seeing the advertisement.
Second, the advertisement of beer can increase the pie of the demand. For example, if we was an advertisement of beer in summer, we just feel like drinking beer. An advertisement can not only get the customers of a competitor, but also can increase the pie of the demand.
Finally, an advertisement is effective to make a long lasting brand. Branding and penetration in the market is important and the companies cannot build them in short-run. An advertisement helps the company to make the prestigious brand in long-run.
3. Antitrust Issues. Some economists opposed the Miller-Coors U.S. merger. They argued that it would create too much concentration in the industry, and lead to more market power and higher prices for consumers. Do you agree and think the merger should have been blocked by the DOJ? Why or why not? Explain briefly but clearly.
According to Steven Newborn, an antitrust attorney with Weil Gotshal & Manges in Washington, D.C. said, “Normally, a 30% market share would not create a problem, but when you have two companies controlling almost 80%, the government may think there is potential for anti-competitive effect.”1 Others have different opinion. "I can see a price war breaking out if MillerCoors starts to gain share from Budweiser," says Roman Shuster, a research analyst in Chicago with Euromonitor International PLC. "InBev is known...