Episode 438: Mavericks, Monopolies And Beer

Feb 25, 2013
Originally published on February 23, 2013 10:27 am

Two big companies have hatched a plan that could allegedly take money out of the pockets of ordinary Americans. And it's not just any money: it's our beer money.

Anheuser-Busch InBev, the biggest brewer in the world, wants to buy Grupo Modelo, the maker of Corona. The U.S. Department of Justice is suing to block the acquisition.

On today's show: The story behind the case, and what it says about monopolies, competition and government regulation.

For more, check out our beer map.

Music: Rihanna's "Cheers (Drink To That)" Find us: Twitter/ Facebook/ Spotify/ Tumblr. Download the Planet Money iPhone App.

Copyright 2018 NPR. To see more, visit http://www.npr.org/.

CAITLIN KENNEY, HOST:

Right now, a group of alleged conspirators are out there allegedly plotting and colluding, putting together a plan that could take money out of the pockets of every single American. Luckily, for all of us there is an unlikely hero on the case, a government agency spending long hours trying to stop these alleged conspirators and trying to protect all of us and our money. And I'm not just talking about any money. I'm talking about our beer money.

(SOUNDBITE OF SONG, "CHEERS")

RIHANNA: (Singing) Cheers to the freaking weekend. I'll drink to that, yeah, yeah.

KENNEY: Hello, and welcome to PLANET MONEY. I'm Caitlin Kenney. Today on the show, collusion, monopolies - oh, hey, Zoe.

ZOE CHACE, HOST:

Sorry. I'm here. I'm here. I'm here. I'm here. OK. I'm late...

KENNEY: (Laughter).

CHACE: ...Yes (laughter). But I brought beer.

KENNEY: Oh, OK.

CHACE: It's Friday. I know we're going to talk about beer on this show. So I bought a bunch of stuff.

KENNEY: All right. (Laughter) yes, we are talking about beer. Do you mind if I finish the top of the show now?

CHACE: Oh, go ahead.

KENNEY: All right. (Laughter). Today on the show, collusion, monopolies, a gigantic beer merger and a secret force of Ph.D. economists trying to stop it.

(SOUNDBITE OF SONG, "CHEERS")

RIHANNA: (Singing) Got a drink on my mind and my mind on my money, yeah, yeah. Looking so bomb - going to find me a honey.

CHACE: So let's start things...

(SOUNDBITE OF SONG, "CHEERS")

RIHANNA: (Singing) Got my Ray Bans on and I'm feeling...

CHACE: ...Off maybe with a drink.

KENNEY: OK.

CHACE: What...

KENNEY: Sure.

CHACE: OK.

KENNEY: It's Friday.

CHACE: So this is basically what I have. I have Beck's. I have Bass, Grolsch Lager. What do you - Stella. Want a Stella?

KENNEY: Yeah. I mean, you got anything more exciting? What's that what with the gold top you've got in there.

CHACE: That's Leffe Blonde. That's kind of fancy. It's like Belgian Boddingtons.

KENNEY: Oh, I love Estelle.

CHACE: I love Boddingtons.

KENNEY: It has the...

CHACE: It's so fancy.

KENNEY: ...Nitrogen, right?

CHACE: Yeah. It's like an English whatever - anyway.

KENNEY: All right. I'm going to drink this one.

CHACE: I have some options is basically what I have.

KENNEY: All right.

CAITLIN KENNEY AND ZOE CHACE: Cheers...

CHACE: To economic competition, perfectly exemplified by the many options I have brought you today.

KENNEY: I kind of - I feel bad about saying this because I know you spent a lot of time shopping...

CHACE: (Laughter).

KENNEY: ...And it looks like you really tried to get some diversity of brands here. But I've got to tell you. Every single beer you just offered me, yeah, they're all owned by one company - Anheuser-Busch InBev.

CHACE: Like the Budweiser people?

KENNEY: Yep.

CHACE: So the Budweiser - all of these, like the Leffe Blonde one...

KENNEY: Yep.

CHACE: And the Stella is a - is Bud - like that's the same dudes?

KENNEY: Yep. And, in fact, actually that is why we are talking about beer today because Anheuser-Busch InBev, they're already so big. They already own all these beer companies. But now they're trying to acquire a bunch more beers. They're trying to acquire a bunch of beers owned by Grupo Modelo.

CHACE: Grupo Modelo? I am familiar with this Grupo (laughter) OK, because I actually probably drank those beers more than any other - like Negro Modelo, Pacifico, Coronas, right? That's those guys.

KENNEY: Yeah, the Corona, the number one imported beer here in America, that's them.

CHACE: So let's start the story here in June. So Anheuser-Busch InBev, that's the big company. Remember. We're just going to call them team Budweiser for simplicity. They announced that they were going to buy this other company, Modelo.

KENNEY: Now, before that could happen, our unlikely heroes got involved. Remember, I mentioned them at the top. Our unlikely heroes, they are the antitrust division of the Department of Justice. And it's their job to basically keep our beer money safe. They, along with the Federal Trade Commission - the FTC, another government agency - they're what's called competition enforcers.

CHACE: Competition enforcers. I love it.

KENNEY: (Laughter) Yeah. And just like a - any enforcer, they have some weapons at their disposal, a big one, something you might not think of as a weapon - economists, Ph.D. economists. The Department of Justice has about 50 of them on staff. Carl Shapiro, he used to be one of them.

CARL SHAPIRO: We all believe in a competitive economy, I think. That requires a cop on the beat to make sure that companies don't merge to stop competing, don't collude to stop competing and that large companies that are dominant don't break the rules to keep little companies from threatening them.

KENNEY: I don't know if you noticed, but he kind of said the word competition, compete a lot. And that's because that is the antitrust division's focus. Their mission is to, quote, "protect economic competition." All right. So let's say you have a bunch of companies out there in the world selling the same thing - beer - because we happen to (laughter) have a lot of it.

CHACE: (Laughter) Right.

KENNEY: So you've got one company here selling Budweiser. You've got another company over here selling Miller Lite.

CHACE: And those are two different companies?

KENNEY: Yes...

CHACE: OK.

KENNEY: ...Two different companies. OK. Then you've got another company over here selling Corona. So you've got options to choose from, right? And that's a good thing because, you know, if Budweiser wants to raise their prices, they're kind of scared because they know if they raise them too much, you'll just say screw it. I'm just going to drink Corona or Miller instead.

CHACE: Right. And - so that is the price-setting mechanism in the market, right? Like, they don't want you to trade to a different brand. So they try to keep prices low.

KENNEY: Exactly. And this is the way economists like to see things working out.

But what worries them, what worries these competition enforcers, is a situation where we have right now where one of these companies wants to buy the other because if you buy a company that used to be your competitor, you're going to have more power because, you know, the average beer drinker is going to have less options. So they won't have as much choice to not pay a higher price.

KENNEY: Yeah. And the other thing that competition does is if you (laughter) have fewer players in the market, you're less likely to innovate if you have fewer competitors, right? You're less likely to come up with cool new beers to attract customers because you already have so much of the market.

KENNEY: Yeah. And that is the type of thing that competition enforcers worry about. That's what they're afraid of happening. I talked to Fiona Scott Morton. She's an economics professor at Yale, about this. She used to be the chief economist at the antitrust division.

CHACE: Here's to Yale and economists.

FIONA SCOTT MORTON: So it's very important that the government doesn't allow monopolies to form through merger. That would kind of undo the great effect of innovation and competition that we see in many of the markets in the United States.

KENNEY: So if people like Fiona Scott Morton and people who work in the antitrust division now, if they think a merger is going to do something like this, is going to form a monopoly that might hurt consumers, they've got to prove it. They've got to make their case because Budweiser can just say, hey, this isn't going to make a monopoly. I mean, haven't you guys heard of the craft beer revolution?

CHACE: (Laughter) Exactly. So that's the thing. Like, that doesn't really make sense to me about when you were even talking about who's in the market because I live in Park Slope, Brooklyn. And on my corner, there's a store called Bierkraft In fact, in every corner there's basically a store called Bierkraft. And it's just (laughter) like oatmeal, stout, hard cider, farmhouse ale situation. Like, I just had Monk's sour ale the other night.

I feel like there is a ton of competition out there in the market.

KENNEY: So, you know, exactly what you just said. That's what the Justice Department has to figure out. They have to figure out - is Bud Light actually competing with the - let's see - Sweetwater Happy Ending Imperial Stout. I'm not making that (laughter) name up, by the way. So if you look at the core complaint because the DOJ to try to get this merger to stop happening, if they want to block it, they have to go to court and prove their case. So this is a complaint that they put together to present to the court. And if you look at the complaint, I have it right here, the Department of Justice claims that Bud Light is not competing with Sweetwater Happy Ending Imperial Stout. They say Bud Light is in an entirely different market.

CHACE: Which actually does kind of make common sense. And, also, the Justice Department says don't just take our word for it. This is what you, Budweiser, this is what your company says inside your company all the time to each other.

So in the complaint it says, like, the remaining sales of beer in the U.S. are divided among Heineken and fringe competitors, including many craft brewers, which the defendants characterized as being fragmented dot-dot-dot small players.

KENNEY: (Laughter) And this is one of the things - that right there, that quote, because those words are actually in quotes - "fragmented, small players" - these came from internal company documents. Just like a regular investigation, when the Department of Justice is trying to prove whether something like this could be bad or not, they require both the companies involved to turnover all these internal documents - I mean, emails, board memos, strategic plans, competitive analysis.

And lots of people I talked to about this process, they told me that when they go through these documents, sometimes they're looking for a smoking gun. In antitrust, there's a special word for this. They call it a hot document.

SCOTT MORTON: They do call them that.

KENNEY: Again, former chief economist at the antitrust division Fiona Scott Morton.

SCOTT MORTON: A hot document is one that is extremely helpful and explicit about the nature of competition in the industry. So it, you know - occasionally, believe it or not, people will write emails that say something like, you know, I can't wait until we buy our competitor. Then we can raise price by 15 percent. And, by the way, there's nobody else in our market, so our customers will have to pay the extra 15 percent.

SHAPIRO: Oh, yeah. Hot documents.

KENNEY: Here's Carl Shapiro. He's another former chief economist at the antitrust division.

SHAPIRO: If you have a document where one company says - gee, if we buy these other guys, we're not going to have to have a price war. And we'll avoid that - seems like a good idea. We'll all make more money. That's a hot document.

KENNEY: I can't - it's shocking to me that people still send emails like that knowing that if, you know, a merger comes up, all that stuff can be pulled.

SHAPIRO: Well, it's rare to see - that would be a sizzling document (laughter) the one I described, OK. But, look, you know, companies have to do their business. They have to go to the board of directors to get approval. In the normal course of business, people will send emails or have slide presentations, for example.

CHACE: OK. So just to recap, this is where we are with the Justice Department is doing. They need to figure out what the market is, who is a competitor, who is not, look for documents to prove their case. And in this case with the proposed beer merger, there are actually some warmish documents, right? And we're going to get to that. But I'm going to get another beer. What are you...

(LAUGHTER)

KENNEY: That sounds good.

CHACE: OK.

KENNEY: Give me that Grolsch.

CHACE: Cheers.

KENNEY: Cheers.

All right. So this...

CHACE: OK. So...

KENNEY: ...I have to...

CHACE: ...On with the story.

KENNEY: OK. So the next thing they have to do - if you want to imagine how this works, you've got to sort of picture a crime show. And you know that scene in a crime show where the prosecutor is laying out the case step by step saying, and then this happened, and then this happened. Well, in this case, in this antitrust merger review, in this case, the antitrust division isn't saying an actual crime has been committed, right?

But they have to make the same kind of argument. This is how harm will occur. These are the steps we think that will lead to consumers being hurt. You can sort of think of it as their theory of the case.

And, Zoe, let's just play it out here. We're going to make the Justice Department's case. And we'll use those beer bottles we had before. You still have those three over there?

CHACE: Yeah. OK. So this is Anheuser-Busch InBev, the biggest beer company in the world, right?

KENNEY: OK. And over here I've got number two, Miller. I say B. Miller. They're the second biggest beer company in America. Between Bud that you've got over there and Miller that I have over here, they have almost two-thirds of the beer market in the U.S. These two companies make up 65 percent of beer sales.

CHACE: OK. And then this is where it gets interesting because down here, little Modelo, right? Compared to the big guys, Modelo is little. It's only 7 percent of the beer market. And the merger that the Justice Department is worried about is not between Bud and Miller, the two biggest guys. It's between Bud and the little guy, Modelo. So what's the problem with that?

KENNEY: Well, the problem with that is that according to the Justice Department, these two, Bud and Miller, even though they look like competitors, the Justice Department alleges that they don't act like it. I talked about this with Sandeep Vaheesan. He's an antitrust lawyer and a research fellow at the American Antitrust Institute.

SANDEEP VAHEESAN: It looks like Anheuser-Busch InBev and MillerCoors have a fairly cozy relationship in that if one company, typically Anheuser-Busch InBev, raises price, the other, MillerCoors, will follow. Modelo however hasn't used the same model. It's actually resisted price increases in several instances and applied downward pressure on the big two.

CHACE: So that is why the Justice Department is worried because this relatively small company, Modelo, the makers of Corona, they are in effect what's keeping the big guys from working together and raising prices.

KENNEY: And the Justice Department actually has a special name for companies like Modelo, a little company that's essential for keeping a market competitive, they call it - I love this - a maverick. Fiona Scott Morton worked on a case involving a maverick. It was a proposed merger between H&R Block and a company that made a product called TaxAct.

SCOTT MORTON: And this TaxAct story is really what we call a maverick story.

KENNEY: The company that made TaxAct was called 2SS Holdings. And they were competing with two big guys in the market, H&R Block and Intuit, the people who make Turbo Tax. All three companies made tax software. All three companies had a free version for e-filing your federal tax return.

But what made TaxAct a maverick was that their free version was much better. They spent a lot of time on it. It had a lot of features. It was pretty comparable to stuff that the other companies were charging for. Not only that but they promoted it really heavily. The other two companies, H&R Block and Intuit, they only improved their free products after TaxAct.

Aggressively giving away something for free - that makes you a maverick.

SCOTT MORTON: The maverick is really helping consumers by disrupting this tacit understanding and coordination among the big firms not to compete too hard. And the maverick is breaking that up and is really benefiting consumers. And you don't want the maverick to be bought up by one of these big firms. The DOJ's interest is in preserving the maverick.

KENNEY: Here's Sandeep Vaheesan again.

VAHEESAN: Based on the complaint, Modelo certainly appears to be a maverick in that it provides an important competitive spur in the market forcing the big two to price their products competitively and also broaden their product portfolio.

CHACE: I love this so much. And it actually makes me want to just raise a Modelo right now to the maverick. Here is to the maverick, right?

KENNEY: Cheers.

CHACE: (Laughter) Because they've been keeping prices low for us, for all of the Bud Light and Miller Lite drinkers all over the world. Thank you to the maverick.

KENNEY: Allegedly. (Laughter) OK. So...

CHACE: (Laughter) Right.

KENNEY: ...You can actually see the Justice Department talking about this right here in their complaint. They quote from ABI - Anheuser-Busch InBev - team Budweiser from their vice president of sales.

And basically it's just this person talking about the fact that because Corona is selling so well in New York City in the market that it's putting pressure on team Budweiser and that, you know, they had planned to increase their prices. But now that plan could be quote, "in jeopardy."

CHACE: So just to be clear, this is a really classic example of the benefit of competition, right? So according to the Justice Department, these guys, Budweiser and Miller, they both want to raise their prices. But Modelo won't play along. And - so in order for the guys to compete with Modelo, they can't raise their prices as much as they want.

KENNEY: Exactly. Now there's another benefit that Modelo brings as this maverick company and that's innovation, variety, new products. And I'm going to show you what I mean here, Zoe.

All right. Where's that Corona? OK.

CHACE: It's next to you.

KENNEY: Here it is. Drink this.

CHACE: No. I can't drink this. There's no - I mean, I'm not going to drink a Corona without a lime. Like, Corona...

KENNEY: Aha, aha.

CHACE: (Laughter).

KENNEY: You, my friend have spotted the innovation...

KENNEY: Yes.

KENNEY: ...Lime. OK, not the lime exactly but what the lime represents. So if you look at the complaint, they talk about the fact that Anheuser-Busch InBev, team Budweiser, they wanted to create this Corona killer.

And it was around this time, around 2008, that that's when Budweiser came out with Bud Light Lime. They launched it in 2008. And the complaint says that it was quote, "targeted at Corona," commonly served with a slice of lime. And it says that Budweiser went so far as to mimic Corona's distinctive clear bottle.

CHACE: And I've got to say, like, if you look at Corona and Bud Light Lime next to each other, they look exactly like the same beer. They're the same color. The only thing is that Bud Light Lime has this cartoon lime on it. I'm going to try to see if it's - and it (laughter) totally tastes the same. Like, it's weird.

So all you Bud Light Lime drinkers, you've got to thank Corona. Corona is the reason you have Bud Light Lime today. That is the maverick's doing.

KENNEY: And this right there, this is the crux of the Justice Department's case. They say Modelo is a serious competitor, that they're keeping Anheuser-Busch InBev, team Budweiser in line, that because of Corona, Budweiser has had to keep its prices low. And it's had to innovate, it's hard to create new beers, things like Bud Light Lime. The Department of Justice sees Corona, Grupo Modelo as a maverick. And they love mavericks.

CHACE: So I've got to say. This seems like an open-and-shut case. Keep Modelo independent. Do not let the big bad beer company take it over. Done.

KENNEY: Zoe - Zoe - Zoe.

CHACE: Yes.

KENNEY: You know it's not that simple. Come on. There are big mergers like this all the time. You can't just say, no, you're not allowed to do it. So Anheuser-Busch InBev, team Budweiser, they really want this deal to go through. And they're basically bending over backwards to appease the Justice Department.

Basically they've said if you let us have Modelo, if you let us acquire all of Grupo Modelo, we'll just sell off the U.S. part of the business. I mean, someone else can sell Corona and those other beers in the U.S. We'll give them a brewery so they can brew it. Basically, if you let us do this, we'll let the maverick roam free in the U.S. But we'll be able to sell Corona all over the rest of the world.

CHACE: (Laughter). OK. So, wait. I just think we have one last thing to address, which is what are going to do with all (laughter) this beer?

KENNEY: (Laughter) What do you mean, Zoe? It's Friday. We're going to drink it.

CHACE: True.

KENNEY: Cheers.

CHACE: Cheers.

(SOUNDBITE OF SONG, "CHEERS")

RIHANNA: (Singing) Yeah. Cheers to the freaking weekend. I'll drink to that, yeah, yeah. Oh, let the Jameson sink in...

CHACE: As always, PLANET MONEY listeners, we want to know what you thought of the show. You can email us - planetmoney@npr.org.

KENNEY: And be sure to check out our blog, npr.org/money. We have this sweet map there that shows all the brands across the globe that are owned by SAB Miller and Anheuser-Busch InBev. And it's just, like, really cool to look at and see and think about it.

I'm Caitlin Kenney.

CHACE: I'm Zoe Chace. Thanks for listening.

(SOUNDBITE OF SONG, "CHEERS")

RIHANNA: (Singing) That.

UNIDENTIFIED SINGER: (Singing) Yeah, yeah, yeah. Yeah, yeah, yeah.

RIHANNA: (Singing) And I'll drink to that.

UNIDENTIFIED SINGER: (Singing) Yeah, yeah, yeah, yeah, yeah.

UNIDENTIFIED PEOPLE: (Singing) Cheers to the freaking weekend. I'll drink to that, yeah, yeah. Oh, let the Jameson sink in...

RIHANNA: (Singing) I'll drink to that, yeah, yeah. Don't let the bastards get you down. Turn it around with another round. Transcript provided by NPR, Copyright NPR.