By Eric Crampton 08/02/2018

The Atlantic’s Derek Thompson likes craft beer. But his take on its rise in the US doesn’t make a lot of sense. And I’m surprised that Noah Smith didn’t catch the errors.

Thompson argues that the complicated morass of American state-level regulations around brewing and beer distribution meant that the big brewers couldn’t take the whole field.

At the end of Prohibition, lawmakers felt that smashing these vertical monopolies was critical to promoting safe drinking. After the passage of the 21st Amendment, citizens in all states voted to abolish tied houses by separating the producers, like brewers, from the retailers, like bars. This led to a “three-tier system” in which producers (tier one) sold to independent middlemen that were wholesalers or distributors (tier two), who then sold to retailers (tier three).

By dividing the liquor business into three distinct groups, these state-by-state rules made the alcohol industry deliberately inefficient and hard to monopolize. “The great effervescence in America’s beer industry is largely the product of a market structure designed to ensure moral balances, one that relies on independent middlemen to limit the reach and power of the giants,” wrote Barry Lynn, the executive director at the Open Markets Institute, a nonprofit that researches antitrust issues.

The modern alcohol sector is specially designed to promote variety, in other ways. So-called “thing of value” laws make it illegal for beer producers to offer gifts to retailers in an attempt to purchase favorable shelf space. Other rules make it illegal for producers to buy shelf space, which saves room for smaller brewers to thrive at supermarkets and liquor stores. Altogether, these rules are designed to check the political and economic power of the largest alcohol companies while creating ample space for upstarts.

If the U.S. had long ago allowed a couple of corporations to take over both the distribution and retailing of wine before the Napa Valley renaissance, Lynn told The Atlantic in an interview, Americans would be exclusively sipping three varieties of Gallo table wine. “The reason that didn’t happen 50 years ago is because you had this system that was designed to promote deconcentration, to incentivize [retailers] to go out and find the new, the different, the alternatives,” he said. “It was effective in achieving that aim.”

Let’s now imagine a country that didn’t have these kinds of rules. Where brewers could choose whichever distributor they liked, or sell direct to the public, or sell direct to supermarkets and other retailers, or run it as a brewpub – whatever they wanted. A country where it was easy for supermarkets to get bulk deals with preferred brewers so they faced wholesale prices much lower than some of their retail competitors. And where nothing particularly blocked larger brewers from buying up smaller ones – or from putting in the taps for new bars in exchange for whatever tap access rules they and the bar can agree on.

If you think that gives you an oligopolistic or duopolistic market, think again. New Zealand has none of those dumb rules and has a craft beer scene that rivals the best American states. It’s easy for new craft brewers to set up – and I can no longer keep track of all of them. We have concentrated retail markets for supermarkets; one of the chains leaves all of the beer stocking decisions to their local franchise and some of those have superb selection. Craft beer’s widely available in pubs, and Lion’s purchase of a few craft brewers has made craft even more accessible.

Bottom line: you don’t need stupid inefficient rules in order to get good beer. You just need to make sure you don’t set rules that make it too hard for new brewers to set up and compete. New Zealand has that, and the beer’s great here. 

Image: Photo by Paloma A. on Unsplash