Beer Economics - Supply and Demand Essay Example for Free

Beer Economics Supply and Demand EssayThe laws of Supply and Demand may be a simple concept except when it comes to beer. Two large beer companies make water formed an Oligopoly and have taken the power from the people. Income high, or income low, beer will be purchased heretofore if the price is not always right. A social gathering is not social without the presence of beer. Beer has been a growing industry year after year. The craft, or microbrewery industry, has grown tremendously since the early 1980s, and the Brewers Association reckons that there are now over 1,500 brewing companies in the country, a level not seen since Prohibition was introduced in 1919 (Krafoff, 1). Pabst Blue Ribbon, in 1890 the most usual beer in the U. S. , has seen its market place share drop to 2. 8%, but it has enjoyed a resurgence due to its cheap price, worthy taste, and new-found cachet among urban hipsters (Krafoff, 1). The beer market is a completely open market. Any champion with a mark eting idea and a recipe can get a contract brewery to make the product (Krafoff, 1). Almost every bar has a dozen taps with independent and local brews, but there are dickens definite brands you wont ever have to look hard for Coors and Budweiser.As recently as 2004, 64 percent of the global beer market willpower was fragmented among ten beer corporations (Anderson, 5). In 2008 the merger of Anheuser-Busch (A-B) and global giant InBev created the worlds largest brewer Anheuser-Busch InBev (ABI), followed by SABMiller (second-largest) and Molson Coors Brewing Company (fifth-largest) (Anderson, 5). To better compete with ABIs growing world beer market share, SABMiller and Molson Coors combined their U. S. and Puerto Rico operations to establish their joint venture, MillerCoors LCC (Anderson, 5).With these massive consolidations, the dickens beer giants (ABI and MillerCoors) now have combined control of more than 40 percent of the world beer market and 80 percent of the United Stat es beer market (Anderson, 5). MolsonCoors operates in the United States, Canada and the United Kingdom. Their products include Coors Light, Coors, Keystone Light, Blue Moon, MGD 64 and many some other recognizable beers. Their number one competitor is Anheuser-Busch. Their products include Budweiser, Bud Light, Michelob, Shock Top and many others. The beer market has formed into a real oligopoly a market with just a few firms dominating the industry.Both MolsonCoors and Anheuser-Busch have substantial market power and control over beer prices. They are mutually interdependent. MolsonCoors cant raise the price of Coors Light unless Anheuser-Busch raises the price of Bud Light. Both companies are forced into the game theory. They have to play a snapshot game of what the other company is going to do and lower or raise their prices based upon their assumptions. It may seem easy for them to just agree to the same price and share the market. Unfortunately, that is called a cartel, an d is illegal in the United States.Their products have few substitutes and concomitants. A substitute of beer is wine as the cross-price elasticity is . 23. A complement to beer is hard liquor as the cross-price elasticity is -0. 11. Beer is an elastic product because it is not a necessity. Demand is highly affected by price. An example of this is highly popular discount brands such as Keystone Light. MolsonCoors products are equally as elastic as their competitor Anheuser-Busch. They offer discount beers as well as microbrew style beers. Beer is an inferior good. As income falls, quantity of beer demanded falls.Beer has a negative income elasticity of demand of -0. 09. This is because when society becomes richer (income rises) things such as fine wines and spirits are substituted for beer. Beer has a couple factors working in its favor. First, the United States is in a recession, thus income is low, and the quantity demanded of beer is high. Second the marginal utility of beer incr eases as more is consumed. The utility of one beer is high but increases with every added beer. This is a major advantage to the two beer giants and their profits. There is not an infinite supply of a given beer.This seems unimportant when no one wants said beer, but is important when it is in high demand. Ideally, the amount of beer will meet (or come close to meeting) the desire for it, meeting a market equilibrium. It may not taste like it, but our beer is actually in danger. The popularity of corn-based ethanol has already caused a tight market for malt, one of beers three unfavourable ingredients, as farmers increasingly forgo the barley crops used to make it in favor of more profitable corn (Boyer, 1). This has caused a worldwide shortage in hops, thus a large increase in price.Barley has risen from $157. 6 USD per metric ton in March 2007 to $202. 53 USD per metric ton. The other key ingredient in beer (along with water), hops is a flower that gives beer flavor and aroma (Bo yer, 1). The shortage comes after a decade-long surplus discouraged farmers from planting the crop, which grows on trestles and can take years to mature (Boyer, 1). Since 1994, the amount of farm acreage planted in hops worldwide has declined by about half (Boyer, 1). Together, the two mean the beer industry now faces a 10 to 15 percent shortage (Boyer, 1). On the upside, water, aluminum and yeast are widely available and have stable prices.According to MolsonCoors financials, their total revenue (p x q) is $3,254,000. We can assume that they sell every beer at about $3 which would make their quantity exchange at approximately 1,084,667 cans. Thats billions This business model seems to be working. Molson Coors is currently earning economic profits. Their current net income is 670 million dollars. The stockholders equity is currently 7,779. The current fix rate is 3. 5% so by multiplying that by the stockholders equity we can assume the owners implicit cost are approximately 272. 7 million dollars. MolsonCoors generates profits of about 397. 03 million dollars per year.Beer is a profitable product because it is widely sold in many markets and, despite rising costs, fairly twopenny to produce. Since MolsonCoors has been a company for many years, they have low long run average total costs. Over the years they have been able to decrease their operating(a) costs and increase production and in doing so, reaching a point of economies of scale. Below is a fictitious example of how as quantity rises, total costs only rise a little bit.