Product Line Extension among New England Craft Breweries

By Berning, Joshua; McCullough, Michael | Agricultural and Resource Economics Review, April 2017 | Go to article overview

Product Line Extension among New England Craft Breweries


Berning, Joshua, McCullough, Michael, Agricultural and Resource Economics Review


(ProQuest: ... denotes formulae omitted.)

Breweries are classified according to their ownership structure and the volume of beer they produce annually. Craft breweries are "small, independent, traditional" breweries that emphasize the quality of their products over the quantity (Brewers Association 2013), and a generally accepted classification for craft breweries is barrel production (a barrel is equivalent to 31 gallons) of six million or less per year. Breweries classified as micro produce 15,000 barrels or less per year. At that scale, craft breweries do not approach the minimum efficient scale of production of large macro producers that brew considerably more than 6 million barrels per year (Tremblay and Tremblay 2005). In addition, the U.S. brewing industry is characterized by large barriers to entry related to economies of scale in production, marketing, and distribution of products (Porter 1980, Tremblay and Tremblay 2005). Brewing vats, bottling and kegging lines, and especially fermentation tanks require a large amount of start-up investment and occupy a good deal of space. Furthermore, many states prohibit direct sales by breweries, requiring them to sell through independent wholesalers, which adds another transactional barrier.

Despite the many challenges, the craft segment of the beer industry has experienced significant growth over the past 20 years even as larger brewers have seen decreasing sales (Redding 2013). In 2014, there were more than 3,000 craft breweries in the United States, the most since the 1870s, and approximately 1,000 additional breweries were added in 2015 (Brewers Association 2015). Because craft brewers cannot compete with macro brewers in terms of volume, they tend to offer a wide variety of products to satisfy ever-evolving consumer tastes. Thus, it is informative to consider how craft breweries develop their product offerings and compete for market share.

Product proliferation has important impacts on firms' market power, which can affect the conduct and performance of firms in the brewing industry (Tremblay and Tremblay 1996). In particular, product line proliferation can deter potential entrants, thus limiting competition and product diversity (Schmalensee 1978, Scherer 1979). On the positive side, product proliferation can provide welfare benefits for variety-seeking consumers as long as prices for the various products do not significantly rise. It also can generate economies of scope (Baumol, Panzar, and Willig 1982), which can reduce a firm's average cost of production and risk of excess capacity and potentially create interdependence of brands (Tremblay and Tremblay 1996). Finally, product proliferation is important in terms of marketing; understanding how firms develop product line strategies can provide insight into how relatively small firms can compete in industries that present similarly large barriers.

For our analysis, we gather data on product offerings by craft breweries in the New England area and the characteristics of those breweries and the surrounding economic region. We determine the total number of beer products available in 2013 and how many of those products were core products that were brewed year round versus seasonal beers that were produced periodically in relatively small batches. Using a structural model of firm behavior and findings from previous studies, we estimate how characteristics of the firms and the geographic region affect each firm's degree of product differentiation. Our estimates point to several links between those characteristics and the number of core and seasonal beers offered that drive both product proliferation and specialization by craft breweries. Furthermore, certain types of market environments lend themselves to more-diverse sets of firms.

Motivation

Large U.S. macro breweries are widely known for their flagship or core1 brews such as Budweiser, Miller Lite, and Coors. These are mass produced beers benefitting from scale economies and extensive distribution in every market in the United States. …

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