Weak beer and antitrust economics

Yesterday’s Wall Street Journal brought the story, “Bud Crowded Out by Craft Beer Craze.” While Bud Light is currently the highest selling beer in the United States, the flagship brand Budweiser is fading. The international beverage giant is scrambling to win over younger drinkers to boost Budweiser sales, so the familiar Clydesdale horses are out this holiday season and ads will take on a younger vibe.

On Facebook Alexie Marcoux commented that Budweiser’s decline ought to put the end to the old Galbraithian narratives about corporations so powerful they can dictate tastes and preferences. We can hope (but I’m not hopeful — I suspect the demand for evil dragons to be slain by heroic antitrust economists will keep the myth alive).

The beer giant has been through a few mergers over recent years, and I wondered how Budweiser’s troubles were reflected in the related antitrust analysis. Antitrust theory isn’t built on the work of John Kenneth Galbraith, but antitrust narratives conjure similar images of powerful corporations and seemingly helpless consumers (granted that antitrust lawyers write in more leaden prose than JKG).

In January 2013 the U.S. Department of Justice Antitrust office filed a lawsuit challenging Anheuser-Busch InBev’s acquisition of a 100 percent stake in Grupo Modelo. Here is what Justice was worried about just over a year ago:

The Department of Justice filed a civil antitrust lawsuit today challenging Anheuser-Busch InBev’s (ABI) proposed acquisition of total ownership and control of Grupo Modelo.  The department said that the $20.1 billion transaction would substantially lessen competition in the market for beer in the United States as a whole and in 26 metropolitan areas across the United States, resulting in consumers paying more for beer and having fewer new products from which to choose.

Americans spent at least $80 billion on beer last year.  According to the department, ABI’s Bud Light is the best selling beer in the United States and Modelo’s Corona Extra is the best-selling import.  Because of the size of the beer market in the United States, even a small increase in the price of beer could result in billions of dollars of harm to American consumers, the department said.

According to the department’s complaint, the U.S. beer market is already highly concentrated, and prices are increased by strategic interactions among the largest brewers, including ABI and MillerCoors. ABI generally acts as the price leader, implementing annual price increases in the sub-premium, premium and premium plus segments of the U.S. beer industry. MillerCoors and other brewers have typically joined the ABI price increases, while Modelo has not. By pricing aggressively, Modelo–through its importer, Crown Imports–puts pressure on ABI to maintain or lower prices, especially in certain parts of the country. As a result, Modelo has become a particularly important competitor in the U.S. market.

The press release manages to divide the industry into for segments, from “sub premium” (i.e. Busch and Keystone) to “high end” which is described as including Corona, Heineken, “and a variety of craft beers.” This brief mention, as just a fraction of a segment of the industry, is the only mention of craft beers in the press release. Justice’s formal complaint mentions craft beers three times, each time more or less as an aside — they missed the real market action.

In the resulting agreement, the United States federal government sought to promote competition in the beer industry by, among other things, extracting a promise from the company acquiring a few AB-InBev assets that it would expand the capacity of a brewery in Mexico to at least 20 million hectoliters of packaged beer annually.

For this heroic antitrust effort beer consumers in the United States offer a heart-felt yawn. How many of our tax dollars when into deciding whether the Mexican brewery needed a capacity of 20 million hectoliters, rather than 15 million or 23.5 million?

Meanwhile, actual competition in the market continues to force international beverage giant AB-InBev to scramble for new customers.

NOTE 1: See full collection of Justice documents here.

NOTE 2: It isn’t just the Department of Justice, the private think tank the American Antitrust Institute is also worried about concentration in the beer market. Just a few days ago AAI sent a letter to the Department of Justice expressing concern about rumors of a AB-InBev merge with SABMiller. That letter follows AAI’s lengthy report, Global Beer: Road to Monopoly, which two years ago worried about a then-rumored merger between AB-InBev and SABMiller and the prospect of creating “a huge entity with great market power.”

I keep wondering how great the market power can be in a world without barriers to entry? No real secrets in how to brew beer. I suspect the biggest threats to competition emerge because alcohol distribution is highly regulated in the United States — not because one brewery in Mexico has a smaller than desired production capacity — but I suspect the Department of Justice will not be challenging the post-prohibition three-tier system anytime soon.

Marc Gunther profiles Whole Foods CEO John Mackey

Michael Giberson

Marc Gunther has a good brief profile, “John Mackey: hippie, libertarian, CEO.” I haven’t read Mackey’s new book yet, but may try it this summer. If nothing else, Mackey will provide an interesting counter to Milton Friedman’s famous views on what is now called “corporate social responsibility.”

But Gunther’s essay makes an curious turn, shifting from profiling Mackey to editorializing against Mackey’s embrace of free-enterprise capitalism. Gunther writes:

He can be … [i]deological is his view that markets can solve virtually every problem. He writes, for example, that “in the long arc of history, no human creation has has a greater positive impact on more people more rapidly than free-enterprise capitalism.” Maybe so–although democracy has done a lot for people, too–but Mackey’s faith markets and distrust of government is so absolute that he seems willfully blind to the notion of market failure.

Gunther shifts back, briefly, into biography–college dropout, eastern philosophy, yoga, mediation, veganism–then returns to Mackey’s views on business. Turns out that Mackey thinks some businesses and even whole industries (big Phama, most of Wall Street) have gotten off track, so I wonder why the claim he is “willfully blind to the notion of market failure.”

After a few more details Gunther notes Mackey’s market-oriented optimism and winds up with:

Eventually, he may turn out to be right. But so far, markets have done an imperfect job at best of rewarding the better companies and punishing bad actors. Sure, Lehman Brothers, Bear Stearns and Countrywide all collapsed … [but] tobacco companies are doing fine. Factory farms — a favorite target of Mackey’s — are doing OK, too. Nor are markets solving the climate crisis, or protecting the human rights of factory workers in China or Bangladesh. Only governments can do that.

If it is true that “only governments can” protect human rights of factory workers, then at the least Gunther ought to be weighing the costs of government failure against the costs of market failure. And really, which is more serious, failure of competition in markets to weed out ‘bad actors’ rapidly or failure to protect human rights?

If we count that not all corrupt businesses fail quickly as some kind of failure of free enterprise, then ought we also count that not all corrupt governments fail rapidly as a failure of politics? Of course, corrupt markets and corrupt governments tend to go hand in hand.

And, by the way, “Nor are markets solving the climate crisis”? Tell me, Mr. Gunther, how well is democracy working on climate change policy?

Where is faith most misplaced, in markets or in governments?

American biofuel policy increases hardship on the Guatemalan poor, and you help every time you buy gasoline

Michael Giberson

Next time you see one of those “This product may contain up to 10 percent ethanol” stickers on a gas pump, ask yourself why federal government biofuel policies are forcing you to help increase hunger and hardship among poor Guatemalans.

Sure, politicians in their comfortable offices in Washington, DC, didn’t intend to help starve the world’s poor. But biofuel policy is requiring conversion of food to fuel and contributing to higher corn prices, so having that effect.

Looking at you, Iowa Congressional delegation.

GMO bans and labeling laws

Lynne Kiesling

Tyler Cowen and I have several things in common — wry senses of humor, economist sensibilities, and a strong love of interesting and well-prepared food. Those last two traits at least show up in Tyler’s post yesterday about proposals in California to label foods to indicate whether or not they contain GMOs. Tyler summarizes what for me is the material point: despite hundreds of studies over decades, no scientific evidence exists to support the argument that GMOs present a health hazard. None.

Arguments to ban or label GMOs are usually based on, as Tyler says, the “standards of evidence being applied here are extremely weak”. Having read Gary Taubes recently, and having read some sports nutrition research over the past few years, I think that’s right. Nutrition science research does not have a sufficiently high standard of proof for their hypotheses; nor does it use a combination of random trials and statistical techniques that would enable researchers to draw more than basic correlations.

Tyler’s post is worth your time in its entirety; I think he’s right that rather than expending effort on GMO legislation, California’s food activists should instead focus on antibiotics and treatment of animals, the improvement of which would have substantial and scientifically demonstrated benefits for human and animal health and for the environment.

The food-focused GMO argument, though, does not address explicitly the claimed environmental risks, such as this list from the Union of Concerned Scientists:

As discussed in the 1996 UCS-authored report, The Ecological Risks of Engineered Crops, genetically modified crops pose six kinds of potential risks.19 First, the engineered crops themselves could become weeds, a broad term that covers plants with undesirable effects.20Second, the crops might serve as conduits through which new genes move to wild plants, which could then become weeds. Third, crops engineered to produce viruses could facilitate the creation of new, more virulent or more widely spread viruses. Fourth, plants engineered to express potentially toxic substances could present risks to other organisms like birds or deer. Fifth, crops may initiate a perturbation that may have effects that ripple through an ecosystem in ways that are difficult to predict. Finally, the crops might threaten centers of crop diversity.

Although few problems of the sorts listed above would be expected to surface within the three-to-four-year time frame that the new crops have been in widespread use, the good news is that there have been no serious environmental impacts—certainly no catastrophes—associated with the use of engineered crops in the United States.

Of course, that does not mean that one can conclude that there have been no environmental effects. There may have been modest or subtle changes in animal or plant populations that are simply not dramatic enough or obviously enough connected to engineered crops to attract attention. Other than for insect resistance, there is no systematic monitoring underway in the United States to detect adverse effects of genetically modified crops.21 So much may be going on that we are simply not aware of.

To their credit, this excerpt shows the UCS doing what Tyler is encouraging food writers to do — acknowledge the science as it currently stands. In general, so far we have no evidence for harms 1, 2 or 3, although the UCS expresses continuing concern about harms 4, 5 and 6 to animals and ecosystems. Continued research on these effects makes a lot of sense.

Often lost in this debate are the benefits of GMOs, both to health and the environment: vitamin and mineral supplementation, drought resistance, reduced use of pesticides. Look, for example, at the recent Hunan trial of the revised Golden Rice formulation that now has enough Vitamin A to reduce the incidence of blindness in young children arising from Vitamin A deficiency.

The Hunan trial, conducted in 2008, was meant to determine whether a small bowl a day of genetically modified rice (called Golden because of its yellow colour) could effectively deliver enough Vitamin A to make a difference. Vitamin A deficiency is a scourge of the world’s poor (Vitamin A is contained in fruits and vegetables such as carrots, sweet potatoes and spinach). According to the World Health Organization, Vitamin A deficiency affects about a third of the world’s children under 5. It claims the lives of more than a million people a year, including hundreds of thousands of children. As many as half a million children go blind every year because they don’t get enough Vitamin A.

And yet, environmental groups like Greenpeace protest Golden Rice:

Greenpeace is campaigning vigorously to block Golden Rice trials throughout Southeast Asia. And it has lots of allies, including luminaries such as Naomi Klein and groups such as the Canadian Biotechnology Action Network, whose mission is “collaborative campaigning for food sovereignty and environmental justice.” These groups insist that what the poor really need is utopian political solutions. “Food insecurity is brought about by lack of enough land, by decreasing rice production and decreasing incomes,” says one Golden Rice opponent. “Only through a genuine land reform which ensures farmers’ access to sufficient rice and other food sources will farmers start to become healthy again.”

Utopian indeed. And in the quest for that collectivist utopia, Greenpeace and their collaborators condemn millions of children to blindness, disease, famine, and early death. How’s that for not weighing the benefits when you emphasize the risks?

An Austrian theory of cooking … or a cooking metaphor for Austrian entrepreneurial theory

Lynne Kiesling

As a fellow cook, food lover, and economist who incorporates Austrian entrepreneurial theory into my work, I love Mike’s post commemorating Julia Child’s birthday today. Let’s push it even further.

One way to create value in cooking is through new combinations of what Mike calls “raw elements”. We can think of three categories of raw elements in cooking: ingredients, cooking techniques or the producer’s “interpretation”, and taste or the consumer’s “interpretation”. The combination of these yields the “useful product”, a dish.  These categories lend themselves to Menger’s taxonomy of higher-order and lower-order goods; physical ingredients are goods of the highest order (I would also put in here the capital goods and fuel used in cooking, with which an Austrian capital theorist might quibble, but I’m simplifying here), which a cook combines and a consumer eats, thereby enabling both cook and consumer to benefit from the value creation.

The first important point in this cooking-economics connection is fundamental to economics: the subjective nature of value. The consumer’s interpretation-perception-assessment of the dish is the most clearly subjective element of this dynamic process. Much of value rests in the perception of the ultimate consumer. But there are some subjective aspects of the producer-cook’s interpretation too; that’s where opportunity cost comes in on the supply side. The cook perceives at that moment, in that context, what she thinks is the best use of the raw elements that she is combining to create the dish (ingredients, her time and skill, capital), based on her perception of the alternate uses of these elements. That’s inherently subjective.

The second important point that Mike raises is the entrepreneurship one. Value creation from cooking doesn’t just come from doing the same thing over and over, adding more cooks and more stoves to increase scale (OK, there’s some value in that, but diminishing returns). The cook who explores novel combinations of the raw elements (garlic-artichoke foam from a CO2 canister atop a sous-vide cooked and seared-finished halibut steak, anyone?) is an entrepreneur. The essence of creative cooking, and creative economic activity, is curiosity and experimentation, and those are the essential ingredients in entrepreneurship. This entrepreneurial activity is grounded in some fundamentals, such as the physical chemistry of how ingredients and temperature interact, the ratios in which ingredients generally combine to yield pleasing results, the basic cooking skills, and the physical and neurological reality of our taste system. But the entrepreneur experiments with those fundamentals and pushes their boundaries, using the heterogeneous raw elements and searching out opportunities for “profit” from doing so.

Which brings us to the third important point in my Austrian theory of cooking/cooking as a metaphor for Austrian entrepreneurship. A system that will yield the most valuable and pleasing combinations of entrepreneurial economic or cooking activities will have low entry barriers (anyone can try to cook!) and a robust feedback-based system of error correction. Low entry barriers facilitate creativity in discovering new useful products from the raw elements, as well as enabling new value creation when some of those raw elements change. Error correction, whether a “yuck, that’s gross!” at home or a lack of profits due to low repeat business at a restaurant, is most effective and valuable when there are feedback loops that can inform the cook-producer about the value that the consumer did or did not get from the dish.

Both cooking and economic activity are inherently purposeful, creative, and entrepreneurial, and are better when done in an environment that combines low entry barriers and robust error correction.

And today’s front page Google splash celebrates Julia too. Happy birthday Julia, and thanks for the inspiration.

Nutrition experience, research, and orthodoxy, with some economics parallels

Lynne Kiesling

Last week was our spring break, and I finally took some time to read Gary Taubes’ 2008 book Good Calories, Bad Calories. Taubes is an investigative science journalist who has been writing for years about the science of nutrition and epidemiology, and the book focuses on a long, careful, detailed narrative about how such science has evolved since the mid-19th century. One of the themes that emerges is that some of the most prominent researchers, particularly those advancing the dual hypotheses that fat causes heart disease/overeating causes obesity, did not test their hypotheses for falsification using controlled trials in designing their research, and are also personally invested in doing research that “proves them right”. Thus, Taubes argues, an orthodoxy has formed around these hypotheses when he finds the scientific support for them lacking, and similarly finds support for an alternate hypothesis — refined carbohydrates cause heart disease and obesity. But the orthodoxy resists testing that alternate hypothesis.

I have personal interest in this topic based on my own experience. As a high metabolism athlete for all of my life, I grew up being able to eat almost anything in unrestricted quantities. But when I got my first faculty job out of grad school (at WIlliam & Mary, yay!) in 1992, the combination of teaching and research duties with moving to a swampy climate against which my body rebelled meant a reduction in my activity, bloating because of the humidity, and weight gain. Without really thinking about it (because I hadn’t had to before), I reduced my meat consumption and substituted into (refined and unrefined) carbs. The next two years were right out of Taubes’ book — reduction in calories to manage weight while increasing exercise, but not having enough energy to actually make it meaningful, culminating in what is now known as metabolic syndrome complete with insulin resistance, hormone imbalance, and symptoms of polycystic ovarian syndrome. I then spent two years revamping my diet to reduce refined carbs, include more animal and vegetable protein at every meal, and monitor my hormone and energy levels, and succeeded in reversing all negative symptoms. I returned to the energy levels that have enabled me to do longer and longer distance cycling and triathlon endurance events and the demanding training for them. Even though I don’t eat low-fat, my triglycerides are so low that my doctor marvels at it. Taubes’ argument is consistent with my experience.

Economist Russ Roberts has been experimenting with his diet and exercise for the past six months, following broadly the same principles that I do (including the refined carbs on the weekend), and he reported in on Friday: 20 pounds lost, more energy, feeling of satiation, low triglycerides. Again, consistent with my experience.

You may know Russ for his outstanding EconTalk podcast series, and in November 2011 he interviewed Gary Taubes. The conversation was interesting and informative, and the podcast page lists lots of resources for further reading. One theme that Russ developed in the discussion was that in both nutrition research and economics research, the issues come up of orthodoxy and structuring research questions in ways that generate falsifiable hypotheses when you are studying such a complex, dynamic system as either the human diet/cardio/endocrine system or the human economy. The human traits that incline us toward orthodoxy, whether it’s wanting to prove ourselves right or appeal to authority or some other trait, have led to models and hypotheses that are not supportable or not even meaningfully testable/falsifiable. So for me reading Taubes’ book was a good cautionary tale of the value of humility beyond the analysis of low-carb/low-fat nutrition.

Another insight that comes up in the book that I would add to Russ’ comparison with macroeconomics is heterogeneity. Taubes is careful to point out that individuals have different metabolic experiences and achieve homeostasis with different combinations of fat, carbs, etc., so while low-carb nutrition may allow some people to strike a healthy heart and weight balance, others may be able to eat more carbs and do the same. Heterogeneity means that there’s no one-size-fits-all hypothesis … and as any Austrian macroeconomist will tell you, that’s the argument they put forth about macroeconomic models and aggregation. Heterogeneity in the capital structure in reality means that models abstracting from such heterogeneity are more likely to mislead.

A secret to Chipotle’s good-food-fast innovations

Michael Giberson

At Slate, Matthew Yglesias tells the story of a business that is booming: Chipotle’s Mexican Grill, “a company that shows there’s clearly room for growth and innovation in even the most basic sectors of the economy.”

The chain has been expanding rapidly, Chipotle’s stock has risen 500 percent over 5 years, and yet:

… the food service industry can’t seem to get any respect. Politicians don’t name-drop burrito innovators as examples of the kind of entrepreneurs they want to encourage, and despite food’s ubiquity in our lives, culinary progress is slighted as a source of human progress.

Chipotle’s growth since its 2006 IPO should be seen as a great American success story. There’s nothing new about fast food, of course. But it’s not as if Steve Jobs invented the cellphone.

Yglesias follows with, “In many ways, the Chipotle burrito is very similar to the iPhone.” Maybe that analogy is a little strained, but it doesn’t matter, we get a peak at some of Chipotle’s key innovations. The article usefully reminds us that not all innovations are high tech or high science.

(The article gives a brief shout out to burger chain Five Guys, also a family favorite.)

MORE: Another story of entrepreneurial insight in action: Risk and stealth paid off in Eagle Ford shale.