Vertical agreements: an empirical price analysis of beer

Abstract

In several countries worldwide, the market structure of the brewery industry is one of a limited and decreasing amount of producers. Such highly concentrated production is most often accompanied by significant market power. Furthermore, a common practice of market behaviour is vertical coordination where firms may decide to combine technologically different production processes, distribution processes, marketing processes or any other economic process. In fact, the extent of vertical coordination may range along a continuum from a spot market, contracting, strategic alliance, formal cooperation to full vertical integration. A common strategy of breweries is to conclude exclusivity agreements with bars. This paper reports on a study investigating the impact of vertical agreements between beer producers and beer selling bars on the beer price. A quantitative analysis of vertical agreements was performed using survey data of Belgian bars. Executing a principal component analysis we found four relevant components: component 1 (bar location, bar density), component 2 (bar ownership, exclusivity agreement), component 3 (bar type) and component 4 (beer turnover). To determine the impact of these components on the beer price, a regression analysis was performed. The results show that the beer price is determined by bar location and bar type. We found no impact of existing vertical agreements between brewers and bars on the beer price. This indicates that other aspects such as bar location and bar type are more important to determine the beer price than the existence of vertical agreements.