South-Western College Publishing - Economics  
Of Lizards and Beer
Subject Competitive Oligopoly
Topic Oligopoly
Key Words Market Share, Producer, Profits, Advertising, Prices, Anheuser-Busch
News Story

Anheuser-Busch is the major producer of beer in the U.S. In supermarkets, it has a 41.4 percent market share, while Miller has 24.2 percent, and Coors has 10.8 percent. Anheuser intends to increase its prices in October 1998. It feels that the market can bear it because of record summer sales, spurred in part by a 39 percent increase in advertising expenditures in the first five months of 1998 on commercials featuring, for example, talking lizards. Shareholders are looking forward to some bigger profits.

When Anheuser tried to increase prices in late 1996, it lost market share because Miller discounted its prices. When it matched Miller, it lost profits. Contributing to the problem were consumer concerns about the health implications of beer consumption.

The proposed price increases will vary according to the amount of competition from other beers in the state, the availability of cheaper beer across state lines, the brand and the package size. (Updated October 15, 1998)
Questions

1.What is the three-firm concentration ratio for the supermarket beer industry? Why does this indicate that an oligopoly exists?

2. Draw a diagram of the joint-profit-maximizing position of firms in the oligopolistic beer industry, including the average total and marginal cost curves, the demand curve, and the marginal revenue curve. Mark the equilibrium price and quantity of beer and the amount of profit.
a) In 1996, a price war broke out in which Anheuser was forced to follow Miller in reducing prices. Illustrate this on your diagram, assuming that prices fell to perfectly competitive levels.
b) What happened to the quantity of beer bought and sold? What happened to profits?

3. Draw a second diagram in which the beer producers are maximizing joint profits.
a) Show the effect of the successful intensive advertising campaign. Assume that advertising costs are fixed costs, and that costs went up more than demand.
b) Does this help explain why Anheuser is prepared to raise its prices? How?
Source Rekha Balu, "Anheuser-Busch Plans to Increase Its Beer Prices by 2% to 4% a Case," The Wall Street Journal, August 27, 1998

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