Craft's Lessons For The Economy

                                                                   by Bob Alacqua

In the early 20th century, alcohol producers owned or subsidized many bars and saloons. These establishments
were known as “tied houses,” since the bars were “tied” to the brewers and distillers. Tied houses were mortal
enemies of the temperance movement. They were vertical monopolies that pushed down prices, got patrons
drunk on cheap booze, and upsold them on gambling, prostitution, and other vices.

At the end of Prohibition, lawmakers felt that smashing these vertical monopolies was critical to promoting safe
drinking. After the passage of the 21st Amendment, citizens in all states voted to abolish tied houses by
separating the producers, like brewers, from the retailers, like bars. This led to a “three-tier system” in which
producers (tier one) sold to independent middlemen that were wholesalers or distributors (tier two), who then sold
to retailers (tier three).

By dividing the liquor business into three distinct groups, these state-by-state rules made the alcohol industry
deliberately inefficient and hard to monopolize. “The great effervescence in America’s beer industry is largely the
product of a market structure designed to ensure moral balances, one that relies on independent middlemen to
limit the reach and power of the giants,

It was effective. Until it wasn’t. After Ronald Reagan’s election, the Justice Department relaxed its enforcement of
antitrust laws. This kicked off a period of consolidation in various sectors across the economy, including the beer
industry. Through a cavalcade of mergers in the last 30 years, 48 major brewers joined to form two super-brewer
behemoths—Anheuser-Busch InBev and MillerCoors. Thus, an old system set up to avoid concentration became
characterized by extreme consolidation.

But even as federal antitrust enforcement in the last 30 years has shifted to favor conglomerates, a groundswell
has created the perfect conditions for the craft-beer revolution—or, more accurately, several distinct craft-beer
revolutions. In the early 1980s, a smaller beer boomlet, featuring then-new breweries like Sierra Nevada and
Samuel Adams, foreshadowed today’s larger craft craze.

More recently, many states have made exceptions for small craft breweries to sell beer directly to consumers in
taprooms. These self-distribution laws are controversial. Technically, they create an exception to the cherished
three-tier system in a way that advantages smaller breweries. But economists and beer fans alike often defend
these rules, since they can help small firms establish a fanbase and then phase out when a brewer makes it big.

So, what are the lessons of craft beer’s triumph for the rest of the economy? First, just as research shows that
gargantuan companies are bad for innovation and job creation, the craft-beer boom shows that the burgeoning of
small firms stimulates both product variety and employment. Second, sometimes consumers have their own
reasons to turn against monopolies—particularly in taste-driven industries.  hird, even in an economy obsessed
with efficiency, sometimes it is just as wise to design for inefficiency. Alcohol regulations have long discouraged
vertical consolidation, encouraged retailers to leave room for new brands, and more recently made it easier for
individuals to introduce their own batch of beer to the market. Those are the aims the country should adopt at the
national level, both to make it easier for small firms to grow and to make it harder for large firms to relax.

(based on an article from - SPECIAL REPORT
What the economy can learn from the beer industry.
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