Beer Industry Despite the Recent Thesis

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Brewing companies must therefore not only fight for incremental market share with competitor's brands, but must address the issue of consumers trading down by highlighting the appeal of the premium brand vs. The budget brand.

Game theory comes into play in the beer market because the mainstream beer market has been static for many years. While the import and craft beer segments have grown steadily in recent years, the mainstream market has stagnated. Thus, the mainstream beer market has become a zero-sum game. This has increased the focus in the industry on lifestyle advertising in an attempt to steal customers from competing brands. This is doubly important because all companies must contend with limited capacity for price increases and therefore can improve margins primarily through cost reductions. This leaves all major brands with recipes that involve cheap ingredients in sparse quantities -- there is little differentiation in terms of product quality.

Profit in the industry is presently not maximized. The lack of market growth has resulted in a situation where firms are spending heavily on marketing to win incremental market share. Moreover, the impact of government taxation and elasticity of demand has left firms unable to raise prices as often as they otherwise would.

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Both of these factors put the beer industry into a suboptimal equilibrium. Optimal equilibrium would imply that producers are able to control prices to consumers better and spend less on marketing. This would generate higher profits for the same amount of sales.

Competition in the beer industry is beneficial to consumers. For one, the rise of imports and craft beer has broken the oligopoly in the U.S. beer industry. In a no growth, low-margin scenario, the industry faced declining competition as brewers such as Pabst and Stroh's closed their doors or curtailed their operations. However, specialization has increased consumer choice. In terms of prices, consumers see benefit from competition as well. Given the constraints of the industry, reduced competition would allow for greater incidence of oligopolistic practices. The beer industry players would be able to increase prices without fear of losing critical volume. Thus, the intensity of competition works alongside the market constraints to produce a situation where even under an oligopoly the major brewers have limited capacity to raise prices.

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