by Ankur Sunildatta Fadia

Abstract 

On January 1, 1991, the federal excise tax on beer increased from $9 to $18 per barrel. Young & Bielinska-Kwapisz (2002) discovered that this $9 per barrel tax increase led to a $15-$17 per barrel increase in the end-of-sale price of beer. No study has yet explained why the beer tax increase was overshifted as it passed through the three tiers, namely manufacturers, distributors, and retailers. I hypothesize that manufacturers cooperate under focal point pricing and pass beer tax increases to distributors and retailers with a markup. Applying Taubman’s (1965) model to the beer industry, I show that manufacturers could have theoretically passed the 1991 beer tax increase with a markup. In support of Taubman’s (1965) model, personal interviews and e-mail exchanges with beer distributors revealed that manufacturers can pass beer tax increases with a markup to both distributors and retailers. PPI and CPI data show that manufacturers and retailers substantially marked up prices to distributors and consumers, respectively. Macrobrewer profit data establish that Anheuser-Busch and Miller’s real net profits between 1990 and 1991 increased, in 1982-84 dollars, by $69 and $3 million, respectively, while Coors’s real net profits decreased by $11 million due to rising costs during its expansion to national production. Since Anheuser-Busch and Miller’s output did not significantly increase but their costs did increase from 1990 to 1991, macrobrewers’ profits could have only increased due to rising prices. Moreover, in a leader-follower game it is expected that profits for the dominant firm, Anheuser-Busch, increase more than profits for fringe firms, Miller and Coors. I accept my hypothesis that manufacturers were responsible for overshifting, and as a whole benefited from, the 1991 beer tax increase.

Professor Phillip J. Cook, Faculty Advisor

JEL Codes: H2, H21,

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