Title

Brand level demand and oligopolistic price interaction among domestic and foreign beer brands

Date of Completion

January 1997

Keywords

Business Administration, Marketing|Economics, General|Economics, Agricultural

Degree

Ph.D.

Abstract

This study examines price competition in the US brewing industry with specific attention given to competition between domestic and imported beer brands. The availability of IRI brand level data allows for the hitherto rare opportunity of examining individual brand competition. The principal tools for analysis are demand theory, price reaction theory, and econometrics.^ Demand theory, particularly with respect to separability and multistage budgeting, allows for segmentation of the beer brands into popular, premium, light, and superpremium segments. The superpremium segment is the focus of analysis because all imported brands are in this segment. Price reaction analysis allows for the examination of price interdependencies among brands.^ Demand results indicate that almost all beer brands and all segments have a negative and quite significant (Marshallian) own price elasticity. Cross-price elasticities suggest the existence of both substitutes and complements within segments and among segments.^ Price reaction results suggest most brands within a given segment follow pricing of other brands rather than not reacting or engaging in price rivalry.^ Combining demand theory and price reaction theory allows for the analysis of observable elasticities which incorporates both the Marshallian notion of unilateral elasticity and the price-interdependent notion of coordinated elasticity. Observable elasticities indicate that the demand for all superpremium brands becomes less elastic when pricing interdependence is taken into account. Pricing interdependence was very strong among one tier of superpremium brands (Becks, Heineken, and Amstel Light), but not strong at all among a second tier of superpremium brands (the remaining superpremium brands). The three brands in the first tier, all of which are imports, appeared to have formed a collective niche where coordination of pricing decisions results in substantially less elastic demand for each brand within the niche. The second tier brands, largely composed of domestic brands, tend not to follow the first tier's pricing. Thus, the traditional import competition hypothesis, whereby import penetration causes a competitive response from domestic producers, is not relevant in this case. ^