Does the King Use Its Power? Price Competition in U.S. Brewing

Abstract

Pricing behavior of firms in differentiated product markets has been studied intensely in recent empirical work. Despite several accounts in various industries, price leadership has remained mostly unassessed. This study analyzes price competition in the U.S. brewing industry with a focus on price leadership by the largest U.S. beer producer Anheuser-Busch and its heavily marketed King of Beers brand Budweiser. This paper employs a unique nationwide data set on brand-level sales collected before and after a 100% increase in the federal excise tax on beer. Brand-level demand estimates are combined with several supply models, including several price leadership scenarios, to simulate prices that would have prevailed under each model after the tax increase. These prices are then compared to prices after the tax increase to determine the fit of the different supply models. While Bertrand-Nash behavior appears to be a more suitable model of price competition, it tends to under-predict price increases of more price-elastic brands and to over-predict price increases of less price-elastic brands. In particular, the predicted price of Budweiser is much larger than its actual value. An interpretation of this result is that Anheuser-Busch could exert more market power through its flagship brand than it actually does. Overall, actual price movements as a result of the tax increase tend to be more similar across brands than predicted by any of the models considered. While this pattern is not inconsistent with leadership behavior, leadership models considered in this paper do not conform with this pattern.