Taste renaissance, tax reform, and industrial organization of the beer industry

We develop a theoretical model of the beer industry consisting of two segments: monopolistically competitive heterogeneous craft breweries that compete based on variety and quality and oligopolistically competitive macrobreweries that compete based on economies of scale. We also present empirical ev...

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Bibliographic Details
Published in:Economic inquiry 2021-10, Vol.59 (4), p.1702-1722
Main Authors: Luckstead, Jeff, Devadoss, Stephen
Format: Article
Language:English
Subjects:
Beer
beer industry
Breweries
Brewing industry
Consumers
craft breweries
Economies of scale
Industrial enterprises
Industrial organization
love‐of‐variety
macrobreweries
Manufacturing
monopolistic and oligopolistic competition
Price indexes
Prices
quality
Sales
Taste
Tax reform
Taxation
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Summary:We develop a theoretical model of the beer industry consisting of two segments: monopolistically competitive heterogeneous craft breweries that compete based on variety and quality and oligopolistically competitive macrobreweries that compete based on economies of scale. We also present empirical evidence that, in contrast to the practice in most manufacturing industries, smaller craft breweries pay more for higher quality inputs and charge higher prices. The model is simulated to analyze three counterfactual scenarios: the taste renaissance by expanding consumers' (i) taste for variety and (ii) preference for unique quality beer and (iii) the 2017 tax reform. The taste renaissance scenarios have similar directional effects on the monopolistic segment, but the impacts of an increase in the love‐of‐variety are much stronger than those of an increase in quality. In all three scenarios, the craft segment expands and the macrosegment contracts, but industry‐level sales rise and the aggregate price index declines, benefiting consumers.
ISSN:0095-2583
1465-7295
DOI:10.1111/ecin.12996