Vertical Relationship and Merger Effects in the U.S. Beer Industry

This paper studies the 2008 MillerCoors joint venture in the U.S. beer industry through a vertically related market framework. The cost efficiency and increased upstream market power impacts of this merger are quantitively measured and, more importantly, the effect of downstream concentration on the pass-through of an upstream merger in a vertical relationship is studied. In a vertical relationship, the upstream shock does not fully pass through to the retail price because of post-merger price adjustments. Downstream concentration determines retailer markups and affects the capability of upstream firms to exercise their market power. Estimating demand and supply in a linear pricing model with double marginalization uncovers the changes of costs and markups using pre/post-merger retail data. The results show that brewers’ markups increase, while retailers’markups decrease to mitigate the merger impacts on retail prices, especially in concentrated downstream markets. The effect of market power exceeded cost savings. This merger increased social welfare because the brewers profit gain dominates the consumers’and retailers’welfare loss