Dynamic model of beer pricing and buyouts

The beer industry in the United States is in a period of dramatic transformation. Major breweries are acquiring much smaller craft breweries in an attempt to purchase growth, but it is not clear whether these acquisitions are economically viable. In this paper, we study the impact of craft brewery acquisitions on retail beer prices, and firm profitability in a dynamic, Markov-perfect equilibrium pricing framework. We find that the estimated impact of mergers, or buyouts, is critically dependent upon estimates of the extent of state-dependence in demand and is, in fact, negatively correlated with the initial shock to demand. That is, if the demand shock is positive, the effect of a buyout will be under-estimated by not accounting for state-dependence in demand, while it is over-estimated if the demand shock is negative. This finding is intuitive as the static model will not properly account for the long-term positive effects of a demand shock that is initially positive, or the long-term negative effects that are initially negative. Ultimately, we show that not all the craft-beer buyouts in 2015 made economic sense from the acquirer's perspective. [EconLit Citations: D43, L13, M31].