| The Laws of Economics and Beer by Andrew Smith Jr. Beer, like any good, follows the rules of supply and demand. If one of its ingredients, such as hops, gets more expensive, the price of the end product can go up. If grain prices skyrocket due to increased demand for grain- based ethanol to fuel vehicles, beer prices can go up as well. What makes beer unique is the way it reacts to different economic conditions, and how your government regulates it Is beer a "normal good", meaning that demand increases as income increases? Is it an "inferior good", meaning that demand decreases as income increases (possibly because beer drinkers switch to wine)? Is it a "luxury good", meaning that demand increases outstrip increases in income? That all depends, though research tends to support the idea that beer is a normal good. The beer industry is not homogeneous: there is a wide array of beer types available at different price points. This means that each segment of the overall beer market may react differently to economic cycles. Brewing as an industry is often considered "recession proof." For example, the stock of major beer-producing companies actually rose during the dotcom bust of the late 1990s. However when it comes to the basics at the grocery store beer seems to almost fall into the "can live without" category. When times get tight there isn't necessarily a drop in demand; but a shift to a different type of demand. Consumers switch from more expensive beer to the less expensive varieties, just like consumers switch from name brand goods to the store-brand version. The consumption is there, but it's of the cheaper alternative. Not only do recessions prompt consumers to switch from more expensive brews to more affordable ones, new demand is also coming from some unlikely sources: wine and liquor drinkers. Not only do recessions prompt consumers to switch from more expensive brews to more affordable ones, new demand is also coming from some unlikely sources: wine and liquor drinkers. When one considers the total market for alcohol-based products, wine and spirits have traditionally been sitting on the more expensive end of the scale. Consumers still looking for a certain level of luxury in their alcohol purchase seem to consider some beers as a viable alternative. One way that brewers have tapped into this trend is by offering beers with higher alcohol content, and by emphasizing the exclusivity of craft beers. This is not so dissimilar from any other industry, since suppliers will create new product offerings in order to meet burgeoning demand. As is the general rule in economics, if demand for a certain beer is greater than the amount that the brewer can pump out, prices will be higher. Larger brewers benefit from economies of scale; they are able to procure materials in bulk, have easier access to efficient transportation (beer available in more markets) and can produce a large volume of beer. This is a major factor into why mass-produced beer is less expensive than craft beer. Another factor in the cost of beer and other alcoholic beverages concerns government regulations. Unlike carbonated beverages, fruit drinks and almost any other drink you can think of, the supply of beer is closely- monitored by local, state and federal governments as a "vice." Municipalities regulate the sale of alcohol, either through state-sponsored stores, taxation or other limitations, in order to raise funds or to control the prevalence of alcohol among residents. Political reasons aside, this can have a dramatic effect on the supply of beer, which in turn can increase its prices. Limiting the number of suppliers, such as grocery or convenience stores effectively reduces competition, which in turn can increase the price of the good. Furthermore, there are numerous states in which the government still controls all alcohol distribution. You will have no difficulty finding arbitrary, bizarre, and overtly protectionist alcohol laws in nearly every state in the union. From Virginia’s food-beverage ratio law, which arbitrarily mandates how much booze versus food a restaurant can sell, to Indiana’s cold beer law, which only allows liquor stores (but not gas stations or grocery stores) to sell refrigerated beer, the examples are legion.. Some people also cite the three tiered system as a factor in the price of beer. Nearly every state uses it for alcohol distribution. It is a system that maintains a strict wall of separation between alcohol producers, distributors and retailers. It came about after Prohibition. What is interesting about this system is that it requires all alcohol (there are a few exceptions) to pass through a middleman. The main reason for the system being set up this way was to limit the ability of the producers, such as brewers, to own the primary aspects of the industry: production and retail. The fear was that if big producers controlled everything (like a Standard Oil of alcohol), then consumer choice would be limited and everyone would be worse off. While this has worked to some extent, the regulation has created a number of headaches and leads to higher prices. How much higher? Well, thanks to their legally- mandated monopoly, distributors generally mark beer up drastically — 50 percent is normal. As with any product there are inherent costs in making beer. Click on the chart on the right to see the costs per each component for a typical six pack. Note on the chart - "margin" is not the same as mark up |
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Why beer costs what it does -
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